Ex-mandarin-turned banker Sir Jon Cunliffe not afraid to speak his mind

But he's also not afraid to speak his mind. Last month, he warned an audience of bankers that ignoring the trajectory of house prices and indebtedness was "dangerous" and could "jeopardise" UK financial stability – strong words for a Treasury mandarin turned central banker.

The message was clear, but what was the motivation behind it? "I was worried that if we had a sustained period of house price rises and rising transactions which meant more people were buying more houses at higher prices, financed by higher mortgages, we would see an indebtedness problem. We've seen that happen in the UK before. It's a general economic vulnerability but it's a financial stability risk as well. When I made the speech I thought housing was the biggest financial stability risk. That's the reason we needed to act."

This week, the Financial Policy Committee did just that. Lenders have been told to issue fewer mortgages worth more than 4.5 times a buyer's income and "stress test" borrowers' ability to keep paying their mortgage even if interest rates were 3 percentage points higher. But does Sir Jon believe the measures will work? "We've done the best job we can with the data that we have, looking at historical experience, and we've tried to act ahead of the risk materialising. I don't know if it's enough. I hope it will do what it's intended to do, but the world can evolve in different ways and we've got to keep watching it."

Sir Jon admits Britain's obsession with owning a home could make it more difficult for the Bank to do its job. "What worries me about the housing market [is] people want more housing than there is. The moment they feel their income is going up or has a chance of going up then their preference is to want to buy houses; supply is not keeping up with demand."

While we won't know the full details of the FPC's discussions until next week's record of the meeting is released, Sir Jon says there was a lively debate. "Did we all think the same thing? No. Is that a good thing? Yes. The idea is that you find a range of views, and then you try to find out where the consensus is. The committee came out with a consensus to act to limit the chance of [these risks] financially crystallising."

He also recognises that all new policies risk unintended consequences. In Sweden, some borrowers got around the loan-to-value cap introduced by regulators in 2010 by topping up their mortgage with unsecured debt. Could the same happen here? "I think there are risks that other lenders will come in. We have a de minimis for small lenders [but] we have to monitor them to make sure their lending doesn't suddenly rise," he says.

"There are possibilities that new, non-bank lenders will come in, and we will have to look at that. Some people worry about people going for buy to let [which falls outside the new rules] even though it's for residential purposes. My prime concern is leakage around the system. We will have to watch and see how that develops."

If all else fails, there is another ace up the Bank's sleeve – it could raise interest rates. However, Sir Jon warns that such a move could do more harm than good. "If, over time, the only way you can deal with a financial stability risk is to divert monetary policy from the job of steering the economy to the job of dealing with the risk in the housing sector or somewhere else, there's a cost to that, because you would be optimising it for one sector rather than for the economy as a whole."

Sir Jon also warns of the general risks of raising rates too early. "[We've had] a very deep recession that did a lot of damage to the productive capacity of the economy. It's much harder now to read the economy, and past rules of thumb may not apply. So you have to be quite careful, particularly when you're at the zero bound because if you raise rates and the recovery dies out, you haven't got much policy space."

So does this mean the first rate rise will be a leap of faith? No, he says quickly. "The first rate rise – when it comes – will be a judgment that supply and demand in the economy have evolved in such a way that [merits a rate rise]. For us, the judgment is that you do it on balance. I hope it's not a leap of faith."

CV

Name: Sir Jon Cunliffe

Education: BA, MA, English Language and Literature, Manchester

Career: Lecturer English Literature, University of Western Ontario, posts in Department for Transport, Environment and Treasury. UK Permanent Representative to EU

Family: Married, two daughters

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