Vocabulary

Window guidance is a credit policy allowing central banks to steer bank lending toward certain economic activities. In the post-war period, it was common for both developed and emerging economies to employ various forms of credit control and allocation. However, these policies were virtually discontinued by the 1980s and the mandate of the central banks was reduced to controlling inflation through interest rates. Housing affordability and sustainability are strongly interlinked with monetary policies, particularly because housing prices and supply rely on debt for financing (Muellbauer, 2018). This link is embodied in inflation-adapted interest rates, which are used by central banks to “cool down” the economy and control prices. Currently, high inflation has pushed central banks all over the world to increase interest rates. Increases in interest rates impact the interbank lending rates such as the Euribor or the Libor and ultimately affect the price of credit in an economy. This then influences in particular capital-intensive industries such as housing development and renovation. Social housing organisations (SHOs) which provide social -thus affordable- rental housing, particularly in North-Western Europe, are dependent on credit to finance not only the provision of housing, but also the energy-efficient renovation of their stock. The rise in interest rates resulting from central banks’ monetary policy aimed at curbing inflation puts the financial viability of renovation and new construction in jeopardy. This insight is not new, as the dependence on credit for renovation and maintenance was already foreseen as an issue in the late 90s by the British housing economist Christine Whitehead (1999). Traditionally, governments support social housing providers through grants, subsidies and through the guaranteeing of their debt (Lawson, 2013). For example, publicly owned social housing providers in Germany have their debt rated equally to that of their main owners: municipalities and regions. As a result, their financing costs also benefit from a high rating implying low-interest rates for their debt. This is also the case in France and the Netherlands where ultimately it is public institutions that guarantee SHO debt. For instance, a Dutch social housing provider raises debt at a triple AAA rating, that of the Dutch state. This lowers their interest costs in comparison to that of other companies which may be rated lower, hence have a higher risk premium and pay more for their debt (Fernández et al., forthcoming). In an inflationary environment, where interest rates rise across the board, this means higher financing costs for SHOs despite their risk premium remaining constant. Window guidance is relevant in this context because it would allow central banks to set a lower interest rate for lending to certain activities, thus creating a window. During the period between 1945-1980, advanced and emerging economies alike implemented interventions on credit and capital markets. Central banks would align lending with industries, exports and manufacturing while increasing interest rates for less desirable sectors (Bezemer et al., 2023; Hodgman, 1973). According to Bezemer et al., (2023) based on Hodgman (1973) and Goodhart (1989 pp. 156–158), ‘credit guidance’, ‘credit controls’, ‘credit ceilings’, ‘directed credit’, and ‘moral suasion’ are also common names for these types of policy. More recently, organisations such as Positive Money have been advocating for a sovereign money proposal where banks would obtain funds from their national central bank with limitations on their usage (Youel, 2022). This enhanced control over bank lending opens up the possibility of earmarking private capital for investment in decarbonisation activities. For example, lending for speculative purposes or for highly polluting activities could be curtailed while the financial viability of environmentally friendly activities could be expanded. Ultimately, credit controls offer the possibility to guide credit toward the provision of affordable and sustainable housing and away from sectors such as fossil fuels or speculative bubbles.