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By David Milliken and Huw Jones
LONDON, Nov 28 (Reuters) - The Bank of England said onThursday that it would heavily scale back a scheme launched lastyear to boost mortgage lending, as house price inflation looksset to accelerate further.
Britain's economy has staged an unexpected turnaround sincethe BoE launched the Funding for Lending Scheme with Britain'sfinance ministry in July 2012 to help increase lending tohome-buyers and businesses.
The scheme will now focus solely on enabling greater lendingto small firms that still find it hard to borrow.
"Although the growth in household loan volumes remainsmodest, activity is picking up and house price inflation appearsto be gaining momentum," BoE Governor Mark Carney said in aletter to finance minister George Osborne, who backed the move.
Earlier this week Carney faced questions from lawmakers whoare worried that a house price bubble is in the making, and thatBritain's economic recovery is hampered by a lack of lending tosmall firms.
"We should refocus the FLS so that it continues to supportlending to the business sector, without adding further broadsupport to household lending at a time when that is no longernecessary," Carney said in Thursday's letter.
Economic growth in the three months to September was thefastest in three years, banks have far easier access to finance,and house prices are now rising at an annual rate of nearly 7percent on some measures, above their long-run average.
Most of the increase in house prices is concentrated inLondon and nearby areas, but Carney said price rises now seem tobe spreading more broadly across the country, and that someexternal forecasters predicted a 10 percent rise for 2014.
Under the FLS, banks and building societies are able toaccess cheap credit from the BoE in proportion to how much theyincrease lending.
On Thursday, the BoE said that increases in lending tohouseholds from Jan. 1, 2014 would not entitle banks to accessto cheap finance, although existing entitlements would not beaffected. Fees charged to banks business finance would bereduced to the lowest point on the existing scale, 0.25 percent.
The BoE also said that favourable capital treatment for newhome loans made under the FLS would end on Dec. 31. Five, mainlysmall, lenders benefit from this at present.
Carney said the changes to the FLS did not have implicationsfor a separate government scheme, Help to Buy, which aims tolift construction and assist home-buyers who lack large mortgagedeposits, and which the BoE will review next September.
The BoE also signalled that it was ready to take furtheraction to cool housing if need be, including recommending a capon how big mortgages can be relative to property values andborrowers' salaries.
Currently the BoE lacks the power to force banks to followits recommendations on such caps, but it could instead requirebanks to hold extra capital against risky lending - anotheroption that it outlined.
Away from Britain's housing market, the BoE said a strongereconomic outlook meant that risks to financial stabilityappeared lower.
However, risks remained as many countries, firms andindividuals were highly indebted and vulnerable if a sharp risein interest rates outpaced any increase in their incomes.
