LONDON (Reuters) - Britain’s European Union referendum could push up credit costs and weaken sterling more, the Bank of England warned on Tuesday, as it moved to bolster banks’ risk buffers and slow a boom in lending to landlords.

The central bank said the outlook for financial stability had worsened since its last report in November, saying a rebound in Chinese lending was “concerning” and that June 23’s vote on leaving the EU was now the biggest domestic risk.

BoE Governor Mark Carney came under fire from some pro-Brexit lawmakers earlier this month for exaggerating the dangers of leaving the EU, though the central bank does not have an official position on whether Britain should remain.

The BoE’s Financial Policy Committee, which Carney chairs, said on Tuesday that “heightened and prolonged uncertainty ... could lead to a further depreciation of sterling and affect the cost ... of financing for a broad range of UK borrowers.”

Sterling has fallen to a seven-year low against the dollar since the start of the year and markets price in extra volatility for around the date of the referendum.

While much of the BoE’s concern about Brexit was familiar, less expected was its decision to tighten credit checks on landlords and move ahead with a disputed plan to vary the size of banks’ risk buffers over the economic cycle.

The immediate impact of both measures is likely to be modest, but they indicate a policy direction and may have a greater effect over time if the Bank expands them.

Buy-to-let lending has boomed in Britain in recent years, and is now worth 200 billion pounds ($286 billion).

However, Prime Minister David Cameron’s government has been keen to boost individual home ownership and is raising taxes on the sector, leading the BoE to fear that banks’ plans to raise gross lending to landlords by 20 percent a year might come at the cost of credit standards.

A taxi and buses queue outside the Bank of England in London, Britain December 10, 2015. REUTERS/Luke MacGregor

TOUGHER RULES MAY COME

As a result, the BoE has recommended banks ensure they take new tax rules into account when assessing loan applications, check landlords’ incomes properly and ensure rental income will be enough to cover a mortgage rate of at least 5.5 percent.

The BoE said most lenders already had similar rules, but that it expected enforcing the rules universally would reduce the number of mortgage approvals in three years’ time by 10-20 percent compared with doing nothing.

“It’s timid,” Capital Economics’s Paul Hollingsworth said, adding much of the gross lending growth was existing landlords switching mortgages rather than new lending. “They are doing a lot of red flag waving rather than taking some serious action.”

The Council for Mortgage Lenders said the measures did not appear to curtail existing market practices.

Tougher rules may come later, however, if finance minister George Osborne follows through with plans to give the BoE more fine-grained powers over buy-to-let mortgage terms, similar to powers it has already used on residential mortgages.

The BoE also said it would start to raise the new cyclical element of its capital framework, which rises and falls as the risk of imprudent lending changes over the business cycle, after policymakers failed to reach agreement in December.

This new buffer sits on top of the minimum and is built up in good times to stop credit supply becoming too frothy, and tapped when the economy weakens and some loans turn sour.

Banks will have to hold a 0.5 percent counter-cyclical buffer by the end of March 2017. That is equivalent to a relatively modest 5 billion pounds for the banking system as a whole and halfway towards its neutral level of 1 percent.

Moreover, for larger banks the bulk of the increase to 0.5 percent will be canceled out by a cut in another capital requirement.

“While a big symbolic step, there is unlikely to be a large impact,” HSBC economist Simon Wells said.