As the UK economy continues to gain strength, Standard Life Investments has warned the central bank against relying too heavily on the macroprudential channel.
The Bank of England (BoE) has the option of using macroprudential tools to curb excesses in particular sectors of the economy, such as housing.
“We think the Financial Policy Committee should be prepared to intervene in the UK housing market if activity continues to snowball,” Standard Life Investments UK economist James McCann said.
“More generally, however, we would caution against too great a reliance on the macroprudential channel,” he added. “These tools are, to a large extent, untested in the UK.
“We do not yet fully understand how well they work, the time lags involved, and the feedback loops to other parts of the economy.”
However, if the recovery continues, the BoE should look to start gradually tightening monetary policy in a timely manner, or potentially face the more damaging prospect of having to hike rates more aggressively down the line, Mr McCann said.
“The BoE continues to be surprised by the strength of recovery in the UK,” he said.
“Its forward guidance has been scrapped but it continues to signal that tightening remains some way off.
“The strength of the recovery, and in particular the impact that this is having on the housing market, suggests that this might not be too distant a prospect.”
The UK official cash rate is currently 0.5 per cent, unchanged since March 2009.
However, a Treasury survey shows that both Nomura and personal financial services company and mortgage provider Santander expect the BoE to raise rates to 1.75 per cent by the end of next year.