The UK bond market does not believe the Bank of England

Yesterday we heard quite a bit from policymakers at the Bank of England. But before we get to it the economic world it faces has changed in a couple of important respects. One I pointed out on Twitter in the morning.

The UK ten-year yield has fallen below 3% this morning as UK borrowing costs continue to tumble…

So the “Black Hole” in UK public finances if it ever existed is now smaller. Also a subject which was in the news has seen some radio silence. For out purposes if we switch to the fifty-year yield at 2.84% we can borrow much more cheaply. Quite a few castles in the sky have crumbled which is probably why we are not hearing much. It is taking its time to feed into mortgage rates but it is beginning.

Mortgage rates on five-year fixed deals have dipped below 6 per cent for the first time in nearly two months…….The average rate on a five-year fixed-rate mortgage fell to 5.95 per cent on Tuesday, the lowest level since early October, according to data provider Moneyfacts. ( Financial Times).

As ever the declines come more slowly than the rises but more have happened since Tuesday so it is in play now. On this road we see something else which is really rather awkward for those who claimed that the Bank of England lost £65 billion when it intervened in the UK Gilt market as long-dated yields soared. Its £19.3 billion holding is on quite a nice profit as we stand and they start selling next week.

Next up is quite a change for the UK Pound.

GBP through 1.21 ( @CNBCJou )

This is really rather different to the panic around US $1.03 which was rather short lasting as we have seen a change in the strength of the US Dollar. The move if sustained will help in bringing inflation down as we have to pay less for commodities and especially in an energy crisis oil and gas.There is an old Bank of England rule of thumb for this and it suggests that the equivalent tightening of monetary policy is of the order of a 1.25% increase in Bank Rate.


On Wednesday Chief Economist Huw Pill spoke to the Institute of Directors and got himself in rather a tangle again.

By the autumn of 2021, the need to start tightening the monetary policy stance was becoming more evident as those new inflationary shocks mounted.

So evident in fact he did nothing about it! Then we got this.

Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group………rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy.

This is an issue we have looked at and Huw wants to use it as an excuse for failed monetary policy but he hit trouble the very next morning.

Overall, net migration continued to add to the UK population in the YE June 2022, with an estimated 504,000 more people arriving long-term to the UK than departing. ( Office for National Statistics)

As you can see the potential labour supply situation was looking rather different and Huw yet again was in a tangle.

Bank of England Watchers Conference

Here Sir David Ramsden spoke although he prefers to be called Dave. He opened with something of a tale of failure.

Inflation is now expected to peak at 10.9% in 2022Q4,
over three times higher than was forecast only a year ago,

Actually it has already reached 11.1% but I guess Dave has been playing with his set of economic models again. Also why should anyone take much note of a body which has just been so wrong?

before falling sharply from the middle of 2023, to well below target by 2024Q4.

After all they are confessing to have been completely wrong about economic growth as well.

With the economy already likely to be in a recession which is forecast to be prolonged, GDP growth is negative in the year to 2023Q4 and 2024Q4, to 7.5 per cent below what was forecast a year ago.

Just to complete the set they were also completely wrong about the labour market.

Despite much weaker growth, unemployment looks likely to be lower in 2022Q4 than was forecast a year ago
and wage growth is forecast to be much higher, 5 ¾% compared with 1 ¼%.

As the World Cup is in we can look at this in the light of a football manager any of whom would have been sacked ages ago for such performances. But it is an other worldly place highlighted by the fact that Dave is the Bank of England “markets man” despite having zero experience of working in one.

He thinks he is looking decisive here but he is merely illustrating my point that making larger increases later is a signal of failure.

As the MPC has become increasingly focused on the prospect of more persistence in inflation, it has tightened policy more sharply. In the five meetings from December 2021 to  June 2022, Bank rate was increased by 1.15 percentage points in total. In the three meetings from August 2022 to November 2022 Bank rate has been increased by a cumulative 1.75 percentage points.

Then we get to something that makes me wonder if he has been reading me?

We have increased Bank Rate very rapidly over the last year and on past experience a change in interest
rates has its peak impact on inflation only after around 18-24 months. But it is possible that the increased proportion of households on fixed rate mortgages means the full effect of policy takes longer to come through and/or is larger when it does, such that inflation comes down more quickly through 2023.

Actually there is one divergence and that comes from his maths as the move is more likely in early 2024. It is quite a critique of the Bank of England and central banks generally.

What next? He wants us to think he is keen on more.

then I expect that further increases in Bank rate are going to be required to ensure a sustainable return of inflation
to target. Considerable uncertainties remain around the outlook and if the outlook suggests more persistent inflationary pressures then I will continue to vote to respond forcefully.

The next bit can be taken two ways. The first is that he is at least being honest and the second is that he wanted to pre-empt someone else pointing it out. Here he is from February.

“I do not envisage Bank rate rising to anything
like its pre-2007 level of 5%, let alone to the kind of levels we used to see before the MPC was formed in 1997”


The first issue is why was I not at a Bank of England “watchers” conference? Easy as I was not invited. Switching to policy there is a simple logical problem. If you tell people about a “prolonged recession” and revise your GDP growth path down by 7.5% then you are going to see bond markets look ahead to future interest-rate cuts. All the rhetoric in the world will not change that. Putting it another way the ten-year yield was the same as Bank Rate yesterday morning meaning they expect that the interest-rate rise in December ( 0.5%?) and any subsequent ones will be reversed.

Markets ebb and flow and the ten-year yield is 3.1% as I type this. But the Bank of England faces an issue created by its own forecast of a severe recession which was created by its assumption of a 5.25% Bank Rate.

Actually the real player is a combination of energy prices and what the weather does this winter.






Are the Swedes back to being sadomonetarists?

This week has been one where many of our themes are in play but we can start with a reference to a claim by Paul Krugman of the New York Times about the Riksbank of Sweden.

“At least as I define it, sadomonetarism is an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low,”

That statement did affect the Riksbank which reversed policy and took Sweden into the icy cold world of negative interest-rates. As we stand the era of ever lower interest-rates has created quite a few problems so in fact there was a point to being concerned about low interest-rates. Indeed they were persisted with when unemployment was low and inflation rising.

Moving onto today we can start with another example of central bankers being pack animals.

To bring down inflation and safeguard the inflation target, the Executive Board has decided to raise the policy rate by 0.75 percentage points to 2.5 per cent. ( Riksbank)

Everyone is now matching the Fed and it does seem to have impacted the US Dollar trend as we thought it would. Also there is something called the Rikshog which has finally happened. Thank you to Martin Enlund for the chart.

As you can see the Riksbank spent many years telling people it would raise interest-rates and didn’t. Whereas once it stopped forecasting that it did. I would say you couldn’t make it up but of course they did! Even worse they had the cheek to call it Forward Guidance when it was anything but.


This is the cause of the change in tack as it makes its impact around much of the world.

In Sweden, too, inflation is still too high. In October, CPIF inflation was 9.3 per cent. This was somewhat below the Riksbank’s forecast in September, but is entirely due to energy prices being lower than expected.

This does leave them with rather a problem though because if they thought inflation would be higher than 9.3% what were they doing having an interest-rate of only 1.75%? We do get a sort of confession here although they do not put it like that.

Demand recovered rapidly after the pandemic and activity in the Swedish economy has been unexpectedly high so far
this year, with a strong development on the labour market.

In itself that is a good thing but rather ironically their Forward Guidance failed to think ahead to the likely consequences.

The good development in demand has meant that companies have to a large degree had the opportunity to pass on their cost increases to consumer prices
and have in this way contributed to the broad upturn in prices.

That is pretty basic central banking ( taking away the punch bowl as the party gets going) but they thought they knew better.

They Promise More More More

After the Rikshog above you may want rather more than a pinch of salt with this.

The policy rate is expected to be raised further at the beginning of next year to then be just under 3 per cent.

Actually that is not very much and they are quite specific in some of the detail at 2.84%. In itself that is quite ridiculous precision from a body that has just got it completely wrong. They are back to their usual fallback which is to prefer their economic models to reality.

Inflation in Sweden has risen rapidly to a very high level, which we have not seen since the beginning of the 1990s, when the inflation target was introduced, but the long-term inflation expectations have remained stable.

As they have just showed they cannot look forwards even 6 months this is derisory stuff. Oh and if it does not work well it is everybody else’s fault.

The Riksbank is determined to bring down inflation. The speed at which this can be attained and the degree of monetary policy tightening this requires will depend,
among other things, on what inflation expectations price-setters and wage negotiators base their actions on.

House Prices

We always end up here if we look at central banking analysis and the truth is central banks act as if they start here. We can begin a little euphemistically.

Interest-rate sensitivity is higher than before in the Swedish economy, and there is considerable uncertainty regarding the way that heavily indebted households in Sweden will be affected by rising interest rates.

How has that happened? Well helps out.

According to Statistics Sweden’s Financial Market Statistics, total lending secured by single-family
homes, tenant-owned apartments and apartment buildings amounted to SEK 5,193 billion at the end of
June 2022. Three years ago, in June 2019, the corresponding figure was SEK 4,314 billion. Lending has
thus increased by SEK 879 billion, or 20 percent, in three years.

Some might think that the low interest-rates Paul Krugman was so keen on were the biggest factor here.

.In the longer term, too, interest rates have fallen. Until the beginning of 2022 the initial fixed rates have dropped
to the lowest levels since at least 1985. Variable interest rates are also at historically low levels.

Now the situation has changed partly in response to the previous interest-rate rises and the Riksbank puts it like this.

.Housing prices have already fallen substantially from the peak at the beginning of the year. The Riksbank’s forecast is that they will continue to fall in the coming years, to around the level prevailing prior to the pandemic.

For newer readers it is all about the “Wealth Effects” or rather an expected reverse for them.

Developments on the Swedish housing market comprise a risk for domestic demand in the coming years.

The Krona

The Riksbank seems to be lost in a land of confusion here.

Over the year, the krona has weakened, which is probably largely connected to the difficulty in predicting the outlook for inflation and economic activity.

Okay so the era of King Dollar has added to inflation which is logical, But then it seems to have disappeared.

At the same time, it is worth pointing out that the krona´s exchange rate has not had a crucial bearing on
the sharply rising inflation this year and it is not expected to have any decisive effect on the clear fall in inflation next year.

Then it returns as quickly as it went.

If the krona appreciation in the current forecast
does not occur, however, it may be somewhat more difficult to bring inflation down to the target.


So we see a rise to 2.5% and guidance towards but not quite 3%. This will impact because if we look at the specifics Sweden has been heading in the opposite direction to the UK.

During the period from January to June 2022, 55 percent of new home loans taken out by households
had variable interest rates. During the spring of 2022, the share of households’ new mortgages with variable interest rate has started to increase. (

Perhaps they listened to the Forward Guidance of their central bank. If so it has just shafted them if I may be permitted a technical term.

As the initial fixed mortgage interest rates have increased more than the variable mortgage interest rates,
demand for the variable interest rates has increased.

If the alternative scenario of inflation being sticky and interest-rates going to 4.65% should happen then they will be royally shafted. Which means that this will be an understatement.

GDP is expected to shrink in 2023, which is visible in the labour market, where the employment rate is falling and
unemployment is rising.

Oh and at these interest-rates its own balance sheet is becoming rather expensive.

The Riksbank’s asset holdings as motivated for monetary policy purposes were around SEK 860 billion in mid-November. Purchases will cease at the end of the
year and securities holdings will thereafter gradually decrease through maturities

New Zealand accepts house price falls and recession to protect the Kiwi Dollar

Today I am returning to s subject which was rather exercising me on Saturday evening. To be precise it was 71 minutes of pain followed by 9 minutes of delight as I watched England play the All Blacks at rugby. It was a curious way to end up at a draw but now in a rugby obsessed country we see this.

The Monetary Policy Committee today increased
the Official Cash Rate (OCR) from 3.5 percent to
4.25 percent.

Although that has become something of the recent standard for interest-rate rises it is in fact a record for the Reserve Bank of New Zealand. Such was their concern they considered setting an even clearer record for a rise.

The Committee gave consideration to an increase in
the OCR of 75 or 100 basis points. On the balance of risks, the Committee agreed that a 75 basis point increase was appropriate at this meeting.

A large driver of this was probably simply that as I have pointed out many times central bankers are pack animals and thus 0.75% was likely to win out. Also this brings in my generic critique that you should start with larger increases and then fine-tune so they have got their speed of travel wrong. This is especially awkward when you start too late. Also it is an issue that central banks were made independent to avoid, and has thus failed.


We get our first clue about trouble here as we repeat the pack animal behaviour.

The Committee remains
resolute in achieving the Monetary Policy Remit.

In terms of further detail we are told this.

The Committee observed that consumer price inflation in
New Zealand in the September quarter was significantly stronger than expected. Measures of core inflation continued to rise and price pressures broadened.

If we switch to the numbers we see this.

The consumers price index increased 7.2 percent annually in the September 2022 quarter, Stats NZ said today.

The 7.2 percent increase follows an annual increase of 7.3 percent in the June 2022 quarter, and an annual increase of 6.9 percent in the March 2022 quarter.

So in terms of context it was 4.2% above the upper band for the target and 5,2% above the mid-range. Also whilst 0.1% is within the margin of error it was a drop which makes the apparent central banking panic a little curious. Perhaps the more recent update on food inflation gave them a nudge.

Food prices were 10.1 percent higher in October 2022 compared with October 2021, Stats NZ said today.

“This was the highest annual increase since November 2008,” consumer prices senior manager Nicola Growden said.

It would be rather awkward if the RBNZ was responding to what central banks have argued is a “non-core” item for many years, but maybe they were hoping it would not be spotted.

On the other side of the coin last Thursday’s producer price numbers showed a slowing of inflationary pressure.

Producer output and input prices have increased in the September 2022 quarter, Stats NZ said today.

In the September 2022 quarter prices received by producers of goods and services (outputs) increased 1.6 percent compared with the June 2022 quarter. Prices paid by producers of goods and services (inputs) increased 0.8 percent over the same period.

So the output numbers have gone 2.6%, 2,4% and now 1.6% which shows signs of a fading. That is reinforced by the input numbers which after a couple of 3 percent plus numbers has fallen to 0.8% suggesting a weaker output number next time around. Perhaps they feel that the fall in energy prices will not last.

Offsetting this was a fall of 23.2 percent in prices paid by producers in the electricity and gas supply industry.

That is awkward because it would mean that their new enthusiasm for higher interest-rate rises would be due to food and energy which are for central bankers non-core. Could we have a bonfire of the research papers?


Those who argue that central banks also target wage growth will get some food for thought from this.

Average ordinary hourly earnings, as measured by the Quarterly Employment Survey (QES), increased to $37.86, an annual increase of $2.61 or 7.4 percent.

“This is the largest annual rise in ordinary time hourly earnings since this series began in 1989,” international and business performance statistics senior manager Darren Allan said.

Although less so from this.

The LCI’s all salary and wage rates (including overtime) index rose by 3.7 percent, the second highest annual increase since the series began in 1993.

As to the gap well this is part of it.

The LCI’s primary measure of wage inflation adjusts for changes in employment quality. Therefore, employees receiving promotions or moving to different roles do not affect this measure of wage inflation.

Without it the LCI would have been 5.3%.

House Prices

Here we have seen this.

The REINZ House Price Index (HPI) for New Zealand, which measures the changing value of residential
property nationwide, showed an annual decrease of 10.9% from 4,200 in October 2021 to 3,744 — down
12.4% from its peak in November 2021.
New Zealand saw a 0.2% increase in terms of HPI month-on-month movement.

Which the central bank puts like this.

Although New Zealand house prices have now declined by about 11 percent since the November 2021 peak, household
wealth in the June 2022 quarter was still 15 percent higher than at the end of 2020.

So as they would consider it we still have wealth effects from past house price rises. A chill must have gone down their collective spines when they calculated this.

The central projection assumes that house prices will decline by 20 percent in total from the November 2021 peak.

In terms of affordability things now will be tighter than the numbers below which are from the Financial Stability Report of the 2nd of this month.

Among households with mortgages, the average percentage
of disposable income dedicated to debt servicing is expected to rise from a recent low of 9 percent to 20 percent, based
on current mortgage rates.

Some will be particularly hard hit.

. Repayment
increases will be particularly significant for
many households that first borrowed in the
past two years.

That will be especially tough for these.

The decline in prices means that some
borrowers who purchased houses in 2021
are now in negative equity, meaning their
mortgages are larger than the current market
value of their property.

I note that they had used 6% mortgages rates as a benchmark ( presumably thinking we would not see that). Whereas according to the NZ Herald it is arriving for some.

Based on a current average fixed mortgage rate across the stock of loans of 3.8 per cent, the fortnightly mortgage repayment for every $100,000 of debt (30-year term) is around $215 – or roughly $5590 per year, Davidson noted.

“But somebody then refinancing to a current rate of 6 per cent would see that repayment jump by $1602 per year – or more than $8000 if they had a $500,000 loan.


The RBNZ deserves some credit for acting earlier than many of its peers. Although that makes today’s decision a little more curious as its actions back then should be starting to impact. I think that we return to the issue of the US Dollar and matching the moves of the Federal Reserve.

In relation to New Zealand’s goods exports, members observed that a lower New Zealand dollar is
currently mitigating the impact of recent declines in international commodity prices.

Now they find themselves adjusting monetary policy for the external component and are willing to sacrifice the Holy Grail of higher house prices. Of course having previously pumped them up they will be leaving more than a few with a much worse cost of living situation and some with negative equity. Speaking of negative equity the RNBZ will have that as well as it will be paying 4.25% on its bond holdings.

These initiatives have enlarged our balance sheet from its December 2019 (pre-COVID-19) level of $24.60bn to $97.89bn at the end of October 2022.

Still at least their inflation-linked bonds will be doing well. What a masterpiece of investment planning!

Returning to the economy things again get awkward because the consequence of them “saving” the economy in the pandemic is apparently this.

Members noted that a reduction in aggregate demand is projected to cause GDP in the New Zealand economy to temporarily contract by around 1% from 2023.

Ah temporarily……


The QE era now starts to make withdrawals from the UK Public Finances

This morning we have been updated on the latest figures for the UK public finances and let me start with something rather familiar.

UK PSNB Ex Banking Groups Oct: £13.5B (est £21.5B; prev £20.0B)

Yes those who did the forecasts expected £21.5 billion and got £13.5 billion as we wonder if this was part of their job application to join the Office for Budget Responsibility. Speaking of it there was an rather extraordinary defence of it or perhaps his salary by one of its leaders on Bloomberg last week.

The Office for Budget Responsibility’s David Miles told me earlier that the fiscal watchdog’s forecasts are a bit like a sat nav  Good for telling you the direction you’re going in, “always wrong” on the specifics — things always change.

I do not know about your experience of sat navs but when I put in Battersea they bring me home rather than taking me to Brighton as the David Miles version would. I can’t see his version catching on. Still it is pretty well paid for someone who is always wrong.

Your fee is determined by the Treasury and paid by the OBR, and will be £5,356.64 per
month, less statutory deductions as mentioned below

That is for only half the week and another 20% goes into his pension fund.


Whilst better than expected by many the numbers remain quite large.

In October 2022, the public sector spent more than it received in taxes and other income, requiring it to borrow (public sector net borrowing, PSNB ex) £13.5 billion, which was £4.4 billion more than in October 2021 and the fourth highest October borrowing since monthly records began in 1993.

This time around there was something going on with receipts and something I have warned about.

Central government receipts in October 2022 were estimated to have been £70.2 billion, which was £0.7 billion less than in October 2021. Of these receipts, tax revenue increased by £2.5 billion to £51.7 billion.

So other receipts were struggling which sent my eyes straight to this.

Since January 2013, HM Treasury has received regular payments from the Bank of England Asset Purchase Facility Fund (APF) under the indemnity agreement. These payments have now stopped. As a result, central government interest and dividend receipts in October 2022 were estimated to be £1.1 billion, a reduction of £4.3 billion compared with October 2021.

This is an issue that our establishment have long turned their heads away from but as the Bank of England pays Bank Rate on its reserves that has outrun the coupons from its holdings. Remember they were very low during the pandemic period as it drove yields to record lows. Probably does not feel quite so bright now and it will be worse from now on as the 0.75% Bank Rate rise in November has yet to impact. The government gained about £120 billion from QE via transfers but the tide which was coming in is now going out.

Central government spent a fair bit more as well.

Central government bodies spent £76.8 billion on current (or day-to-day) expenditure in October 2022, which was £6.5 billion more than in October 2021.

As so often these days we see that energy was a big factor here as the Energy Bills Support Scheme began.

This month sees the first tranche of EBSS payments, with £1.9 billion of central government expenditure recorded as a current transfer from government to households,

As it stands we do not have an estimate for the October cost for help to businesses/

Payments for the EBRS for businesses will also be recorded as subsidies, but no estimate is yet available for the October 2022 amount.

I cannot see the Energy Price Guarantee ( £2500) being itemised either which is rather a poor show.

Debt Interest

This is now much higher in terms of an overall trend but as it happens was the same as last year.

In October 2022, the interest payable on central government debt was £6.1 billion; £3.3 billion reflected the impact of the RPI.

The numbers have their quirks as in there is a 3 month lag for inflation and some months have more payments than others. Also much of the inflation indexing is added to the debt rather than actually paid out so the issue gets another later of complexity.

One thing that we do know is that issuing debt has got quite a bit cheaper than it was with the UK fifty year yield now 2.83% as opposed to the over 4.5% it rallied to in the post mini-Budget panic.


You may have thought we have already fully covered that but at the same time as the payments coming into the UK Treasury were fading away it also had to pay out.

This month the Bank of England Asset Purchase Facility Fund (APF) received its first payment from HM Treasury under the indemnity agreement (previous payments were made by the APF to HM Treasury).

This £0.8 billion of central government expenditure has been recorded as a capital transfer to the Bank of England,


This is a complex issue as the activities of the Bank of England have inflated it.

The Bank of England contributed £309.4 billion to public sector net debt at the end of October 2022.

Some of this is the mark to market losses on its QE holdings but the larger amount is its Term Funding Scheme which I do not consider to be debt in the conventional sense. It is backed by another financial asset. So when they mature over the next 2/3 years our public finances will not really be improving. You could put a margin of say £20 billion for any losses but more seems rather a hairshirt.

Standing at £2,150.5 billion at the end of October 2022 (or around 85.2% of GDP), PSND ex BoE was £309.4 billion (or 12.3 percentage points of GDP) less than PSND ex.


We have become used to there being issues with the public finances and I still shake my head in what is supposed to be an IT age that we do not have more precise numbers. Indeed for what is one of the topics du jour ( energy subsidies) we have in some cases no numbers at all. I would be expecting another £2.5 billion for households for October.

Switching to the public finances implications of QE I have to confess I am wondering if that was another reason for the delays and dithering on raising interest-rates? Central banks were keeping their own funding costs as low as possible to further please their government masters. After all so many at the Bank of England come straight out of HM Treasury. If they had taken my advice back in 2013 to shrink the QE portfolio we would be in a better place.

Next up is the government itself which only a couple of months ago was embarking on a fiscal stimulus and now after spinning like  a top now espouses a form of austerity. So you can argue the numbers are good or bad! But one thing that would be bad or the new supposed austerity would be if this was carried out.

Shell will review £25bn of investments in British projects after the chancellor extended the windfall tax on energy companies, its UK chairman has told Sky News.

Is inflation beginning to ease?

The economic story of 2022 and indeed the latter part of 2021 has been the rise of inflation. It has come with some nuances as the major areas of energy and more latterly food inflation were ones long dismissed by central bankers as non-core. Presumably it was on that sort of road that ECB President Lagarde stated this.

Inflation came from nowhere

Also it was rather extraordinary from someone who pursued a policy of money supply expansion and negative interest-rates. After all if that is not expansionary then how can higher interest-rates help in reducing inflation?

But whilst we continue to see double-digit increases in consumer inflation we see more and more hints that in some areas the times they are a-changing.

The US

One early hint was this.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis, the same increase as in September, the U.S. Bureau of Labor Statistics reported today.

That was from the tenth of this month and meant that the monthly increases had gone 0%,0.1%,0.4% and 0.4%. This has pulled the annual rate lower.

Over the last 12 months, the all items index increased 7.7 percent before seasonal adjustment.

But more significantly shows hope for a more significant weakening of inflationary pressure. Even the last two month would hard us to an annual rate of 5% and adding the previous two suggests more like 4%. Putting it another way the increase in the last four months is less than in any of March,May or June this year.

Then last Tuesday we got this.

The Producer Price Index for final demand increased 0.2 percent in October, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices rose 0.2 percent in September and were unchanged in August.

As you can see from the quote there is also a clear weakening of the monthly trend. If we add in the -0.4% of July we we see quite a shift from the 1% plus of the first three months of 2022. A cautionary note is that this depends a lot on the behaviour of energy prices.

A major factor in the October decrease in prices for unprocessed goods for intermediate demand was the index for natural gas, which dropped 37.8 percent.

Also the US Federal Reserve on its way to reducing interest-rates via higher interest-rates has in fact raised it in one particular area.

Over half of the October rise in the index for services for intermediate demand can be
attributed to a 6.0-percent increase in prices for business loans (partial).

Oh well as Fleetwood Mac would say.


This does not start especially well.

WIESBADEN – Producer prices for industrial products were 34.5% higher in October 2022 than in October 2021. ( Destatis)

But then we note this.

Compared with September 2022, producer prices fell by 4.2% in October 2022. This was the first month-on-month price decrease since May 2020 (-0.4% compared to April 2020).

Thus the annual rate is a lot better than the 45.8% of the previous report. Switching back to the monthly series we do not have the same sequence of improvement seen in the US as for example August saw an extraordinary surge of 7.9%. But we do have some hope at least and as we are in Europe so much of it is around this.

Compared to September, energy prices fell by an average of 10.4%, mainly due to the fall in prices for electricity and natural gas in distribution.

The trend in this area depends a lot on the weather and here we have an irony. For as long as I have been writing here the weather has been a scapegoat taking the blame for others failures. This time around both is and will be a major player although there is still the issue of past failures in energy policy such as relying in unreliable sources of power.

The revealingly named Blackout News takes up the story.

There are around 28,000 larger wind turbines in Germany. But whether these can also be operated economically is a well-kept secret of the operators. With appropriate simulation models, however, the utilization of most turbine types can be calculated relatively accurately. The NZZ carried out such simulations for 18,000 wind turbines at various German locations. The corresponding weather data from the last 10 years were used to determine the balance.

The result is sobering, because a good quarter of all systems have a utilization rate of less than 20 percent. This means that a system cannot be operated economically using the electricity price alone. Most wind turbines are only worthwhile for their operators because of the state subsidies. Only 15 percent of all systems have a utilization of more than 30 percent.

So we have a cautionary factor which returns us to the weather and  we add to the issue of how cold it will be how much will the wind blow? So far the autumn/winter period has mostly been mild with windy periods.

So any continuation of the favourable weather trend will see further falls in this area which will feed into other areas as energy costs have driven inflation elsewhere. Maybe we saw the beginnings of a response here.

Compared to September 2022, however, metal prices fell by 0.4%.

Crude Oil

From earlier today.

LONDON (Reuters) -Oil prices dropped to trade near two-month lows on Monday, having earlier slid by around $1 a barrel, as supply fears receded while concerns over fuel demand from China and U.S. dollar strength weighed on prices.

Brent crude futures for January had slipped 65 cents, or 0.7%, to $86.97 a barrel by 1000 GMT.

U.S. West Texas Intermediate (WTI) crude futures for December were at $79.71 a barrel, down 37 cents or 0.5%, ahead of the contract’s expiry later on Monday. The more active January contract was down 50 cents or 0.6% to $79.61 a barrel.

That is quite different to the US $120 or so we saw in early June. Also the WTI version is now at pre Ukraine invasion levels. The US has been draining its Strategic Petroleum reserve which is a temporary game but it is also true that recession and slow down fears have fed into the oil price. As last week saw a ten Dollar fall we can expect lower producer price inflation should this persist.


As you can see from the above there has been better news on the inflation front recently topped off by the fall on the price of crude oil last week. Also for those of us not the United States the recent weakening of the US Dollar has helped as 141 Yen, a Euro above 1.02 and the UK Pound £ above US $1.18 all help reduce commodity costs, albeit the US Dollar is stronger this morning.

The elephant in the room to all of this is the subject of energy costs. I have already pointed out the issue of the weather and for Europe in particular the inflationary heat would be on as Glenn Frey would say should we see any sustained period of cold still days. Rather against what we might previously have expected there seems to be a particular danger for France.

France faces a greater risk of a power shortfall in January due to lack of nuclear power, said its grid operator ( Bloomberg)

In a nutshell what looked to be a strength ( nuclear power) has faded in a sequence of breakdowns and over running maintenance.

Jan-23 power in France trades now 130% above Germany. ( @LionHirth )

So for once it is all about the weather….



The ECB faces higher interest-rates and losses on its bond holdings

This morning in Frankfurt ECB President Christine Lagarde has been setting out ger stall on monetary policy. In essence she is presenting herself as a doughty and valiant inflation fighter.

For the ECB, displaying our commitment to our mandate is vital to ensure that inflation expectations remain anchored while inflation is high. We are committed to bringing inflation back down to our medium-term target, and we will take the necessary measures to do so.

How is that going? Well the Deposit Rate of 1.5% rather pales when we note this.

The euro area annual inflation rate was 10.6% in October 2022, up from 9.9% in September. A year earlier, the
rate was 4.1%. ( Eurostat)

Even she will struggle to find an economic theory that suggests an interest-rate some 9.1% below the inflation rate will be a success. Also there is something else in the detail which raises an issue we no longer get told about which is convergence with the Euro area. Anybody can see how that is going too.

The lowest annual rates were registered in France (7.1%), Spain (7.3%) and Malta (7.4%). The highest annual
rates were recorded in Estonia (22.5%), Lithuania (22.1%) .

What will she do?

Although she does not put it like that this is quite a confession of failure.

Inflation in the euro area is far too high, having reached double digits in October for the first time since the start of the monetary union.

Then she sets out her case.

That is why we have been raising rates at our fastest pace ever – by 200 basis points in our last three policy meetings. These rate increases help us to withdraw support for demand more quickly. And they send a clear signal to the public of our determination to bring down inflation, which will help anchor expectations.

She is determined to give the impression of action and “200 basis points” sounds so much better than 2% which some may start comparing with an inflation rate above 10% as inflation is never expressed as 1060 basis points.

Then we get her main message.

We expect to raise rates further – and withdrawing accommodation may not be enough. Ultimately, we will raise rates to levels that bring inflation back down to our medium-term target in a timely manner.

That is being taken as aggressive although a little care is needed because the estimate of the neutral rate for the Euro area is similar to the inflation target at 2%. So we will presumably be there next month. Technically as some say below 2% we will be there next month on current expectations.

Trouble Trouble Trouble

We find ourselves in Taylor Swift territory because President Lagarde is keen to emphasis this.

As I explained recently, how far we need to go, and how fast, will be determined by the inflation outlook.

And again.

In this setting, displaying commitment to our mandate is vital to ensure that inflation expectations remain anchored and second-round effects do not take hold.

Perhaps she should talk to this woman.

Despite eurozone inflation hitting a record high of 4.9 per cent in November, well above the ECB’s target of 2 per cent, Christine Lagarde said it was likely to have peaked and would decline next year.
“I see an inflation profile that looks like a hump . . . and a hump eventually declines,” she said at a Reuters virtual event. Lagarde also repeated her assertion that the ECB was “very unlikely” to raise interest rates next year. ( Financial Times 11 months ago)

It is hard to believe now that 4.9% was a record as we have more than double that. But the fundamental issue is that someone who has been about as wrong as you can be on inflation wants us to look forwards based on her expectations. What could go wrong?

This is a real issue of our times because policy is frequently based on forecasts from bodies which are awful forecasters. In my home country the media were plugging numbers from the Office for Budget Responsibility ignoring the fact that it is always wrong. Here we see that the ECB President is in effect going to be setting the wrong interest-rates because her expectations are much more likely to be misleading than useful.

Why do they do it. Well they can manipulate expectations much more than the actual numbers. Whilst their impact on the actual numbers is for example omitting owner occupied housing that is much less than their crimes with assumptions and forecasting.


This is something else which is awkward. During the pandemic central banks basically threw cheap money at the banks. In the Euro area the cries of “The Precious! The Precious!” were so loud they were paid via negative interest-rates to take the money. That is now awkward because they could round-trip it and get 1.5% now and presumably 2% next month. We do not often see a real world example of the economics concept of “free money” but this is one.

Even the ECB realises that hard pressed workers and consumers will be unhappy about this so they changed the rules.

That is why we recently decided to amend the terms and conditions of our targeted longer-term refinancing operations (TLTRO-III).

Well today is the day or rather the first tranche of repayments.

It brings with it 2 problems. The first is back to expectations and forecasts as the ECB hot this wrong by making it too easy for the banks. Also I recall Mario Draghi assuring us it was a “rules-based organisation” as it has just broken them.

Quantitative Tightening

This is another area that could go off like a hand grenade. We start with a familiar issue which is that this time last year the ECB was still singing along with Andrea True Connection.

More! More! More!

This particularly matters because it was expanding the money supply and easing fiscal policy into an inflation surge. So exactly the opposite of what it is supposed to do. We are back to expectations and forecasts again and the problems when you get them so wrong. Now we are told.

In December we will lay out the key principles for reducing the bond holdings in our asset purchase programme portfolio.

This is being forced on them because some of the holdings are getting expensive now. If you buy bonds and negative yields then paying 1.5% on them means you have a running cost of 2% per annum which will rise. Next on a mark to market basis there will be large losses in some cases. For example looking back on my chart the Italian bond future has lost 21% over the past year. The German one has lost 18%.

Central bankers around the world are looking at QT as they panic about the losses they have made and the running cost which in an irony is being made higher by their own actions.


The simplest issue here is the Bananarama critique of monetary policy.

It ain’t what you do, it’s the way that you do itIt ain’t what you do, it’s the way that you do itIt ain’t what you do, it’s the way that you do itAnd that’s what gets results

In essence they responded last and have done the least of the central banks which are raising interest-rates. This is a particular issue because monetary policy needs to act in advance ( at least a year) as it takes time to operate. Due to the move towards fixed-rate mortgages the lags have got longer. Actually the latter means that the ordinary person on the Frankfurt or Paris omnibus is better at forecasting than the central bankers.

Next up is the elephant in the room.

Additionally, although recent data on GDP growth have surprised on the upside, the risk of recession has increased.

Actually I think the Euro area is in recession but let us use our translator on what she has said. There is no cheerleading about the GDP growth so she doesn’t believe it either. Also mentions of “recession” by a central banker are not to forecast it they are there because they have been warned it has arrived and they need to cover themselves. Later she will claim to have been on the case and most will take that at face value.

Next up is the suggestion that the recession might last for quite a while.

At the same time, historical experience suggests that a recession is unlikely to bring down inflation significantly, at least in the short run.

This is reinforced by the fact that she is giving herself scope to blame others.

In the current environment of high inflation, fiscal policy needs to be temporary, targeted and tailored. It should be temporary, so that it does not push up demand too much over the medium term; targeted, so that the size of the fiscal impulse is limited and benefits those who need it most; and tailored, so that it does not weaken incentives to cut energy demand.

Considering how wrong she has been you might reasonably think she has quite a cheek telling others what to do…


The UK is making a clear fiscal policy error

After only yesterday looking at consumer inflation today we have another sort of inflation as we see another UK mini-Budget although it is badged as an Autumn Statement. Sadly it seems to be predicated on a mistake and as these often are these days the mainstream media has declared the operatives to be the “adults in the room”. So as Talking Heads would say, how did we get here?

Jeremy Hunt, chancellor, will on Thursday seek to restore Britain’s tarnished economic reputation with a massive package of tax rises and spending cuts intended to repair the public finances and tame inflation. “We will face into the storm,” he will say.

That is from the Financial Times and it is a load of nonsense as “repair the public finances” is pretty meaningless. Also if you look at our peers the UK public finances are not in bad shape at all. The numbers below are in comparable terms ( Maastricht).

UK general government gross debt was £2,365.4 billion at the end of Quarter 1 (Jan to Mar) 2022, equivalent to 99.6% of gross domestic product (GDP).

On the same basis France is at 114.4% and Spain 117.7%. The US was at 132.6% at the end of last year. So whilst we are above the EU average of 87.8% we are below the G7 one of 137.3%. Those who follow my updates on the UK definition of the national debt will know that the Term Funding Scheme of the Bank of England has inflated it by more than £200 billion and I wonder if it will wash out of these numbers too as it matures ( assuming of course bank subsidies are ever allowed to end…)

Yet we have ended up with the media ploughing this particular furrow.

You can expect the chancellor to talk about the need to balance the books and fill a fiscal black hole. The Treasury believes it is around £54bn pounds.

What Black Hole?

It has all come from this as reported by the Financial Times back in mid October.

The Institute for Fiscal Studies has said a £60bn fiscal tightening will be required to make the sums add up, implying that Hunt will have to go much further in reversing tax cuts, raising taxes and cutting spending.

Which came from this.

There is huge uncertainty around the exact magnitude, but under a central forecast in 2026–27 we expect borrowing of £103 billion, which would be £71 billion higher than forecast in March. Much of this increase is uncertain ( IFS)

Everyone has ignored the uncertainty part and clung to the forecasts like a drowning man clings to some wood. But something I suspected at the time has already happened.

I have less faith in them here because with inflation so strong combined with the uncertain economic position right now combined with the fact that UK bond yields have been very volatile means this may well be next week’s if not tomorrow’s chip paper.

That was a reference to this.

We forecast that spending on debt interest will be £103 billion in 2023–24, double the £51 billion forecast by the OBR in March and which was already an upwards revision on the £39 billion the OBR forecast in October 2021.

The 4.63% peak of the UK ten-year yield has been replaced by 3.18% so I was right about it being tomorrow’s chip paper. The fifty-year yield is now 2.84%. So much of the analysis is now worthless.

Assumptions about bond or Gilt yields are a big deal in this sort of analysis as Black or indeed White Holes can appear and disappear like magic. Let me give you an example from the Office for Budget Responsibility which is always building castles in the sky. When it started a decade or so ago it predicted that UK bond yields would rise to between 4.5% and 5%, whereas they fell to around 0.5%. It then brought its estimates down just in time for them to rise. But you do not have to take my word for it because the IFS has damned them by pointing out in the course of one year it expected their £39 billion to be £103 billion. Or if you prefer more than one Black Hole!

Moving Targets

The next issue is that there is some sort of target which turns out to be another castle in the sky. For example George Osborne spent his Chancellorship always being 2 years away from a debt nirvana regardless of what point in time we look at. On the end Freddie Mercury put it well.

Is this the real life?Is this just fantasy?

The latter seems much more likely when we note this.

The size of the ‘black hole’ depends on fiscal rules the government sets. Rules this govt has changed 6 times in the last 10 years. ( @Miatsf )

Or as Kylie put it.

I’m spinning around, move out of my way

Economic Growth

As I have pointed out before only a very minor change in economic growth will wipe out any fiscal Black Hole. That is why most official presentations used to suggest 3% GDP growth a year. Even the early days of the Greek crisis suggested it would grow at 2% a year which quickly morphed into a -10%.

Bur after some many years of struggling to find economic growth this is the real issue. Are we Turning Japanese in that way and can expect very little? That has been the recent position. Another real issue is why do we keep going from crisis to crisis?

The Office for Budget Responsibility

This gets an enormous amount of favourable publicity. Some of it is from those who would like a job there although I think that their work is mostly pointless as such jobs are reserved for those who would be described as “one of us” by the apochryphal civil servant Sir Humphrey Appleby. If you look at the 3 members of the Committee you see that 2 are from HM Treasury. This is the sort of thing that only the state can get away with which is claiming to be independent of HM Treasury and then taking back control.

The third member may be worse as Professor David Miles was at the Bank of England and voted for more QE just as we were about to embark on the strongest period of growth we have seen since the credit crunch. So sadly he is the opposite of the famous Who lyric.

I can see for miles and milesI can see for miles and milesI can see for miles and miles and miles and miles and milesOh yeah

Here via the Office for National Statistics is their effort for the single month of September.

This required it to borrow £20.0 billion, which was £5.2 billion more than the £14.8 billion forecast by the Office for Budget Responsibility (OBR).

So that is in current parlance around 10% of a fiscal Black Hole.

Hence my first rule of OBR Club is that the OBR is always wrong.


Those who follow my work will know that I have argued for some time that the Bank of England is in the process of making quite a mistake. It is that by delaying raising interest-rates for a year with its “Transitory” rhetoric it is now making the slow down worse. Or in terms of economic theory it is being procyclical. Oh and for newer readers I was saying that back then. Now we see that our fiscal policy looks set to tighten into a slowing economy as well which compounds the problem.

I hear all sorts of rhetoric like “the markets want this” which is curious. Does anyone believe that any intelligent investor will invest billions on the back of an OBR estimate? That is a route to being poor rather quickly. The truth is that we saw 2 mistakes back in September. Firstly the Bank of England failed to match the interest-rate increase seen in the US. Then the UK government tried several years of fiscal changes in one go with also some arrogance around bankers bonuses which backfired. But behind it was at least some ambition because unwittingly Faisal Islam of the BBC highlighted the real issue earlier when he said the UK was facing a £150 billion energy shock. Or if you prefer nearly 3 fiscal Black Holes.

So what would be preferable would be a more sensible energy policy….

Also remember my suggestion that we should issue some 100 year bonds? If we had done that we would have saved a lot of money. How come the “experts” missed that?


UK Inflation surges again further tightening the cost of living crisis

I would say that the first thought this morning was about the UK inflation rate. But as a Londoner I have to confess it was more along the lines of this being the wettest drought in history! We can apply that to the Bank of England where the various Phds had not only to make sure that their umbrellas meant that not a drop fell on the Governor before explaining this at the morning meeting.

The Consumer Prices Index (CPI) rose by 11.1% in the 12 months to October 2022, up from 10.1% in September 2022.

No amount of sugar applied to the Governor’s morning coffee can sweeten an inflation rate that has risen from 5 times the target to 5.5 times. Perhaps a smudge due to the rain might hide the fact that the annual inflation target has been achieved in a single month.

On a monthly basis, CPI rose by 2.0% in October 2022, compared with a rise of 1.1% in October 2021.

In fact the Office for National Statistics rather ram the point home.

The CPI monthly rate was 2.0% in October 2022, compared with 1.1% in October 2021. This means that, between September and October 2022, the prices of goods and services bought or consumed by UK households have increased by 2.0%. This matched the annual CPI inflation rate in July 2021, meaning prices rose between September and October 2022 by as much as they did in the entire year to July 2021.

If any of the research students fancy a change of career this should do it.

We expect inflation to fall back from the middle of next year, and to be close to our target in two years’ time.

That was from the Bank of England this time last yeat and for those of you wondering what it would be falling back from?

We expect inflation to rise to around 5% in the spring next year. We expect these high rates of inflation to be temporary.

In fact the Governor had rather echoed Humpty-Dumpty in the press conference.

And the answer I would give to that is that there is no fixed
unit of time that is transitory.

What has driven the inflation rise?

The first factor was the semi-annual change in domestic energy prices.

Despite the introduction of the government’s Energy Price Guarantee, gas and electricity prices made the largest upward contribution to the change in both the CPIH and CPI annual inflation rates between September and October 2022.

That was around 0.8% of the monthly rise for the CPI and next up was food which rather echoed many of the earlier releases from around Europe.

The second largest upward contribution to the change came from rising food prices,

That was around 0.2% of the monthly CPI rise and some more detail is below.

The increase in the annual rate for food and non-alcoholic beverages between September and October 2022 was driven by price movements across 10 of the 11 more detailed classes. The largest upward effect came from milk, cheese, and eggs, where prices for shop-bought milk and cheddar cheese rose between September and October 2022 but by more than between the same two months in 2021.

As someone who enjoys a glass of milk I had been noting that as the price of four pints of milk at the supermarket seemed to go from £1.15 to £1.55 in a flash. The rate of food inflation has been on a surge for a while now.

Food and non-alcoholic beverage prices rose by 16.4% in the 12 months to October 2022, up from 14.6% in September 2022. The annual rate of inflation for this category has continued to rise for the last 15 consecutive months, from negative 0.6% in July 2021.

There was a more minor impact from this area.

There was an overall upward contribution of 0.06 percentage points to the change in the annual inflation rate from the recreation and culture section.

We are back to the issue of how you treat price changes resulting from moves in best seller charts for video games? In line with the present zeitgeist the move was upwards.

There was a downwards influence on the annual rate from transport.

Prices were unchanged between September and October 2022 but had increased by 1.5% in 2021.

Tucked away in the detail was a change in an area people ask me about.

The price of second-hand cars fell by 0.6% between September and October 2022, compared with a 4.6% rise in prices between the same months in 2021.

So we did have an area that fell and we are seeing one area I think where the deflationary winds of change are causing some actual disinflation.

This month’s fall in prices meant they fell below the level of last October. This is the first month since before the pandemic that second-hand car prices have been cheaper than they were a year ago.

Retail Prices Index

I have long argued that this measure is our best inflation measure and I rather suspect many are coming to see my point these days.

The all items RPI annual rate is 14.2%, up from 12.6% last month…..The all items RPI is 356.2, up from 347.6 in September.

Let me give you a specific example which is domestic energy where it is recording a 1.2% monthly change as opposed to the 0.8% by CPI. It is much nearer to reality as the weights are based on last year’s much lower spending.

There is another area where it is proving to be a much better measure and it is from an area which has been in the news a lot recently, which is mortgage interest-rates. As it ignores owner-occupied housing the CPI measure does the equivalent of when the football results come on the news “look away now” ( if you are about to watch the highlights). So what is one of the most important areas in the cost of living crisis is ignored.

Whereas the RPI includes mortgage costs which rose by 5.3% on a monthly basis in October. Those of you who read my comment on the Bank Underground website will know that the annual rate was already nearly 20%. Well it is now 26%. It surprises me that the media and other economists are apparently happy to point out soaring mortgage interest-rates but ignore the impact of them on both inflation and the cost of living,


With the present news grim I thought I would invoke Ian Dury and the Blockheads and give us 3 reasons to be cheerful.

  1. It is not as bad as it looks because the £400 payment for domestic energy bills has been ignored. So the rise in the amount we are paying is less than the inflation figures show. CPI should be more like 10.6% and the RPI 13.5%
  2. Whilst producer prices continue to rise the rate of annual growth is fading for both the input and output series. Also if we add up the monthly growth for the last 4 months for the input series it is still 1% lower than the single month off July which preceded this.
  3. As UK bond yields have fallen back to levels we saw before the Kwarteng mini-Budget we can expect mortgage interest-rates to fall as we head into 2023.

The X-Factor will be the weather which has been mild but any sequence of cold still days will put electricity and gas prices under pressure again. Although in the short-term the impact will be for the public finances.

On the other side of the coin is the utter failure of the official inflation measure for rents.

Private rental prices paid by tenants in the UK rose by 3.8% in the 12 months to October 2022, up from 3.7% in the 12 months to September 2022.

That in isolation begs questions when mortgage costs have risen as they have but there is an area where they are clearly wrong. London has seen quite a 2022 surge with sealed bids and financial pain which has passed the official series by.

Private rental prices in London increased by 3.0% in the 12 months to October 2022, up from an increase of 2.8% in September 2022. This is the strongest annual percentage change in London since July 2016. Despite this, London’s rental price percentage change in October 2022 remains the lowest of all English regions.

It is a nonsense and makes of complete nonsense of the official favourite inflation series called CPIH which relies on Imputed Rents as well so that the flawed rental series makes up 24.2% of it.



UK Real Wage falls confirm again that we are in stagflation territory.

Today we have been brought up to date with the state of play in the UK labour market and let us start with the issue of wages. In isolation the position looks strong.

Growth in average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.7% among employees in July to September 2022; this is the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic period.

So pay growth is at approximately 6% which is strong for the UK and is mostly being driven by regular pay. That seems logical as it is hard to think of areas at a time like this that would be seeing surging bonuses. The last part if disappointing on two counts. Firstly the wages figures over the pandemic were a nonsense ( for newer readers I reported them to the Office for Statistics Responsibility). Secondly regular wages must have grown faster in the past but the official series only goes back to 2001. They should make that clear.

As we look to break the numbers down we can see why the public-sector is facing potential strike action.

Average regular pay growth for the private sector was 6.6% in July to September 2022, and 2.2% for the public sector; outside of the height of the pandemic period, this is the largest growth seen for the private sector and the largest difference between the private sector and public sector.

The best performing areas are further broken down below.

The wholesaling, retailing, hotels and restaurants sector saw the largest regular growth rate at 7.3%, followed by the finance and business services sector at 6.2%.

Although a little care is needed due to the fact we have not completely escaped the impact of the furlough schemes on wages.

The wholesaling, retailing, hotels and restaurants sector includes the accommodation and food industry, which had the highest proportion of employees on furlough during July to September 2021. Therefore, the growth rate of 6.3% for accommodation and food may still have a minimal base effect.

I note also that the finance sector continues to do well and that seems to be something of an ongoing theme. When I spoke at the Royal Statistical Society in the summer I recall Jonathan Portes pointing out that post pandemic it was the banking sector which was doing best in wages terms. Also there may be a flicker of hope from the latest monthly figures for the private-sector which have gone, 6.6%, 6,8% and now 7%.

Real Pay

The problem with all of this is simply the issue that even such levels of growth have fallen well behind inflation. Let me welcome an improvement of the analysis of the Office for National Statistics which this time around has given us numbers based on the CPI inflation measure as well as the woeful and widely ignored CPIH.

Using CPI real earnings, in July to September 2022, total pay fell by 3.7% on the year, a larger fall on the year was last seen in February to April 2009 when it fell by 4.5%. Regular pay fell by 3.8% on the year. This is slightly smaller than the record fall we saw in April to June 2022 (4.1%) but still remains among the largest falls we have seen since comparable records began in 2001.

So we have a comparison with the numbers we looked at for the Euro area on the 9th of this month.

So wage growth is lagging inflation by around 5% ( literally 5.5% but I think that is spurious accuracy).

We do not have exactly the same time periods but we seem to be doing slightly better. My caveat here is that I think that the CPI inflation number is too low due to the way that it is under recording the rise in energy bills.


This is a mixed picture which starts well.

The most timely estimate of payrolled employees for October 2022 shows another monthly increase, up 74,000 on the revised September 2022 figures, to a record 29.8 million.

The issue is that it excludes the self-employed.

However for the formal series for the quarter to September employment fell marginally ( 52,000)

The UK employment rate was estimated at 75.5%, largely unchanged compared with the previous three-month period and 1.1 percentage points lower than before the pandemic (December 2019 to February 2020).


So we end with a reminder that this number has never returned to the previous high which reinforces the message from hours worked.

However, compared with the previous three-month period, total actual weekly hours worked decreased by 4.2 million hours to 1.04 billion hours in July to September 2022. This is still 13.3 million hours below pre-coronavirus pandemic levels (December 2019 to February 2020).

In fact it is us men who need to sharpen up as the numbers for women have regained the past peak.

The decrease in the latest three-month period was largely driven by women, although the level for women remains above pre-pandemic levels. Meanwhile, total actual weekly hours worked by men also decreased, and the level remains below pre-pandemic levels.


Regular readers will know that I have downgraded this as a useful measure. This is because it has been under fire for a very long time ( Yes Minister tells us nobody believes the unemployment figures in 1983). My recent issue is the way we are getting record lows at a time when economies are struggling. For the record we are slightly worse than last month.

The UK unemployment rate was estimated at 3.6%, which is 0.2 percentage points lower than the previous three-month period and 0.4 percentage points below pre-pandemic levels.


This is an area on the move and not in a good way.

The UK economic inactivity rate was estimated at 21.6%, which is 0.2 percentage points higher than the previous three-month period and 1.4 percentage points higher than before the pandemic.

Maybe there is still a bit of a student based influence.

Although economic inactivity increased across all age groups in the latest three-month period (July to September 2022), those aged 16 to 24 years and those aged 35 to 49 years drove the increase in inactivity, while those aged 50 to 64 years saw the smallest increase since July to September 2020.

In fact the ONS are wondering this as well.

During the latest period, the number of economically inactive students measured prior to seasonal adjustment showed a decrease, but this was a much smaller decrease than is typically seen at this time of year.

There definitely does seem to be a sickness issue.

During the latest three-month period, those who were economically inactive because of long-term sickness increased to a record high and drove the increase in economic inactivity in July to September 2022.


As you can see this is something of a mixed report. Wages growth would be really good but for that pesky inflation rate! The truth is that we are seeing something of a depression in real wages as I have no confidence in the official figures over the pandemic meaning we never got back to pre credit crunch levels and now they are singing along with Alicia Keys.

Oh, babyI, I, I, I’m fallin’I, I, I, I’m fallin’Fall, fall, fall (sing)Fall

Employment and hours worked were very strong post credit crunch so it is less of a concern they have not made up the post pandemic lost ground. But really what we are seeing is the stagflation that we both feared and expected and the central banks denied.

Polish taxpayers should fear the crisis created by mortgages denominated in Swiss Francs.

Today’s theme is something that has become quite a saga and reminds me of this from Paul Simon.

hello darkness my old friend

I have come to talk with you again

This is because we have been looking at this issue for more than a decade now and it is in vogue in a way as it “blew up” due to large currency swings in the Japanese Yen but particularly for our purposes today the Swiss Franc. Actually there was something familiar last week as the Japanese Yen surged through 139 but let us first remind ourselves of how this problem started. From the Financial Times.

In 2006, Polish couple Marek and Małgorzata Rzewuski bought a house on the outskirts of Warsaw because they were expecting a child and “we wanted more space and our own garden”.
Like hundreds of thousands of other Polish homebuyers at the time, they were advised by their bank to get a mortgage in Swiss francs to benefit from lower interest rates in Switzerland than in Poland. Nobody discussed the flip side of introducing a foreign exchange risk into a 30-year mortgage of SFr200,000 ($205,000).
“This was presented as the best opportunity on the market,” Marek recalls. “The Swiss franc was very stable and very popular and we knew many people who were doing the same.”

The risk here was that they were paying a Swiss Franc liability with a Polish Zloty income or they had taken on a foreign exchange position. Actually there was a flashing amber warning in the Swiss Franc being described as “very stable” but there is no reason for the ordinary person to be aware of that. From the point of view of the Polish banks we see a familiar tale where the lust for commission not only overrides good sense it also leads bankers to behave in a pretty shocking manner.

Actually the Polish courts think so too.

The lending practice in effect ended in 2008. But in the years since, it has become a time bomb for the Polish banking sector as customers like the Rzewuskis have begun winning lawsuits to force their banks to bear the cost of a currency bet that went spectacularly wrong.

The economic background

There is a particular irony in the present situation because we see this.

The Council decided to keep the NBP interest rates unchanged:
▪ reference rate at 6.75%;
▪ lombard rate at 7.25%;
▪ deposit rate at 6.25%;
▪ rediscount rate at 6.80%;
▪ discount rate at 6.85%.

That was from the Polish central bank or NBP last Wednesday and if we look at the Swiss National Bank are you thinking what I am thinking?

We have decided to tighten our monetary
policy further and to raise the SNB policy rate by 0.75 percentage points to 0.5%.

So right now you could pick up a carry of 6% per annum on a variable rate mortgage. Looking good! I guess afters fees the ordinary player would be left with say 4%. But you can see that it is in isolation attractive. But as the Financial Times points out even the unsophisticated should be aware of this.

The franc is now worth more than double its exchange rate of 2 zlotys before the crisis.

4.8 Zloty’s this morning. Actually it has been worse as we saw  5 as the level in early September. But the Polish mortgage borrowers will have seen bother their debt and their monthly payments double.

If we switch to the economic situation we see that the NBP is not optimistic.

In Poland, available monthly data for 2022 Q3, including data on industrial production, construction and assembly output and retail sales, as well as business condition indices, signal that the annual GDP growth decelerated again. A further slowdown of GDP growth is forecast for the coming quarters, while the economic outlook is subject to significant uncertainty.

The Polish statistics office gives us some actual numbers.

In the 2nd quarter of 2022 seasonally adjusted GDP (constant prices, reference year 2015) was lower by 2.1% than in the previous quarter and 4.7% higher than in the 2nd quarter of the previous year.

At the same time Polish workers and consumers are being hit by inflation which is high even for these times.

Inflation in Poland – according to Statistics Poland flash estimate – increased in October 2022 to 17.9% y/y. The increase in inflation in recent months has been mainly due to a gradual pass-through of high commodity prices to consumer prices. High commodity prices were reflected in rising food and energy prices.

So the Polish economic situation is pretty toxic with growth in a sharp reverse and inflation very high.  The NBP has responded with interest-rates just below 7%. Thus we are seeing hard times all round.

What about the banks?

They should be able to make some money from conventional banking with interest-rates at these levels. But the Swiss Franc issue keeps coming back to haunt them.

The court battle comes as banks are already bearing the cost of an eight-month payment holiday granted in July by the government to help mortgage holders cope with inflation, which last month climbed to a 26-year high of 17.9 per cent. ( FT )

The meeting of the Financial Stability Committee back in September did not have a lot to say.

Legal risk associated with the portfolio of FX housing loans and the distressed financial situation of some credit institutions remain the most critical sources of risk to the financial system

But only a few short days later this happened.

WARSAW, Sept 30 (Reuters) – Poland’s Bank Guarantee Fund has started its compulsory restructuring of Getin Noble Bank (GNB.WA), a private lender that faced collapse, the fund said on Friday.

The move will protect client deposits totalling 39.5 billion zloty ($7.98 billion) and safeguard the stability of the financial system, the fund’s statement said.

Although this was rather revealing!

Loans in foreign currencies are excluded from the process, the fund said.

Other banks are struggling too and it raises a wry smile seeing a different German bank hit trouble abroad.

On November 8, mBank joined other Polish institutions in a downturn. It reported a third-quarter loss of 2.28bn zlotys compared with a profit of 27mn zlotys in the same period last year. Its German parent Commerzbank already announced in September a one-time charge of €490mn to provision mBank against Swiss-franc loan exposure. ( FT)

It isn’t always Deutsche Bank. Although we may yet find out that it managed to get involved.

The courts now hold something of a sword of Damocles over the Polisg banking sector.

Polish banks have provisioned a combined 30bn zlotys to cover their Swiss-franc lending. But their final bill could rise by another 100bn zlotys if the judiciary rules that they should have received zero interest rate income on invalid Swiss-franc mortgages, according to Jastrzębski. ( FT)


As I pointed out earlier the terms for Swiss Franc mortgages for Polish borrowers looks better now than they did in the early part of this century. Best not to put your biggest debt in a foreign currency though. But there are ironies in this saga as we note a hero of the Financial Times having a dark past.

After Donald Tusk became prime minister in 2007, he promised Poland would join the euro within four years.
His confidence gave lenders the green light to accelerate the Swiss-franc scheme. The year Tusk came to power, over half of Polish mortgages were issued in Swiss francs.

Also the banks turned down the sort of moves we saw in Hungary and Croatia.

The law would have forced banks to convert all Swiss-franc mortgages to zloty mortgages and would have cost them about 9.5bn zlotys. But the banks successfully lobbied against the law’s implementation, largely because they had won the initial court cases filed by distressed customers. ( FT)

So the banks have been incompetent at every stage of the process. Yet they still seem to rise to the top.

In April, Polish prime minister Mateusz Morawiecki, who is himself a former bank chief executive ( FT).

So we have a situation where the courts have a lot of power over the banks. But the theme of “The Precious! The Precious!” seems very strong in Poland. All the can-kicking has allowed those in charge to dodge full responsibility and even the PM was a banker. Thus if I was a Polish taxpayer I would be very nervous right now.