June 26, 2014 / 3:25 PM / 3 years ago

Sterling, housebuilding shares rally after BoE caps some home loans

4 Min Read

* Housebuilder stocks gain after modest BoE measures

* Hopes of a rate hike in coming months kept alive

* Pound slips a little against dollar after U.S. data

By Jemima Kelly

LONDON, June 26 (Reuters) - Sterling rose to near six-year-highs against the dollar on Thursday and housebuilding stocks gained after Bank of England measures to cool Britain's housing market did not shift interest rate expectations.

The BoE's risk watchdog, the Financial Policy Committee (FPC), sought to slow a housing market that many worry is once again overheating by toughening mortgage affordability tests and announcing a cap on home loans.

But the macroprudential measures announced in the FPC's twice-yearly financial stability report were not as aggressive as some had feared. Tougher action might have increased speculation the bank would hold off for longer than previously thought in raising borrowing costs from current record lows.

The FPC's measures sent sterling to a day's high against the dollar of $1.7040, before retreating to $1.7014 in the afternoon after U.S. data for May showed the largest annual rise in spending on personal consumption since October 2012.

The euro fell by almost half a percent against the pound to 79.87 pence, having hit a low of 79.82 as BoE Governor Mark Carney spoke at a news conference following the FPC report's release.

"The main concern for sterling traders was whether the macroprudential norms would impact interest rate hike expectations," said Nawaz Ali, an analyst at Western Union.

"Clearly they have not, much to the relief of traders. These measures do not alter the MPC (Monetary Policy Committee) debate on hiking interest rates."

Gilt yields rose across the two-, five- and 10-year maturities as markets digested the BoE's measures.

Short-sterling interest rate futures <0#FSS:> fell, pointing to a slight increase in expectations for an earlier rate hike by the BoE. Its main rate is now 0.5 percent.

Rates Up

Housing is at the centre of the debate over whether Britain's economy is really growing more durably and will in time generate more pressure on wages and inflation, which was at a 4 1/2-year low in May.

If the recovery in economic data over the past year is due largely to increased house prices in a handful of key markets - chiefly London - and related borrowing, it may not represent the sort of longer-term recovery that would warrant higher rates.

Carney said he expected momentum in the housing market "to continue for the next year or so" and added that it was not the FPC's role to control house prices. That helped push shares in British housebuilders, including Barratt Developments and Persimmon, more than 5 percent higher.

Although the governor said the central bank had reached "the limit of (its) tolerance" on projected increases in mortgage debt, some argued its actions were not tough enough.

"Many will argue today's measures don't go far enough," said Tom McPhail, head of pensions research at financial services firm Hargreaves Lansdown. "Mark Carney stressed that if someone could get a mortgage yesterday they could get one today." (Additional reporting by Anirban Nag and Andy Bruce; Editing by Catherine Evans)

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