The Bank of England will intervene to restrict mortgage lending if surging property prices create an unsustainable housing bubble, new governor Mark Carney has warned.
Mr Carney said policymakers were closely monitoring Britain's resurgent property market, which has seen home loan approvals rise by 20% and prices lift 5% in the last year amid government measures to revive transactions.
He made the remarks during his first public speech as governor in which he also robustly defended his flagship "forward guidance" policy, casting aside City doubts and hinting that it could be backed up with more stimulus.
The Bank's commitment to low interest rates until unemployment falls to 7% is designed to ease lending conditions and help nurse the economy back to health, but caveats in the policy have left markets sceptical.
Mr Carney suggested he could take further action should this hamper a recovery. But he faces the additional challenge of trying to prevent the low rates causing a dangerous credit binge.
He said the Bank was "acutely aware of the risk of unsustainable credit and house price growth" and said it would be supervising lending to specific sectors more intensively.
Mr Carney said lenders could be asked to restrict borrowing terms or even be forced to hold more cash on their balance sheets to dampen down an over-heated property market. He told reporters that "intensive supervision of activity in that area" was a policy that he was bringing over from his previous role as head of Canada's central bank.
Meanwhile, Mr Carney sought to shore up his forward guidance policy after it led markets to bring forward their expectations of when interest rates would rise - the opposite of the effect he would have hoped for.
It has caused traders to push up yields on government bonds - rates which ultimately have an effect on the price of borrowing for individuals and businesses - but an aide said the governor was "not losing any sleep" over the market reaction and Mr Carney said to focus on the City's view of the policy was "missing the point".
He said that interest rates on 70% of loans to households and 50% of those to businesses were linked to the Bank rate rather than the market.