Looking at unsecured credit growth and business lending means that Bank of England policy is “Upside Down”

This week has seen confirmation that the UK economy continues to grow solidly in economic terms, albeit that the growth has reduced. Today I wish to look again at the area which has driven this growth spurt which is housing which of course via mortgages involves the credit sector of the UK economy too. Yesterday the Nationwide gave us more reinforcement to the theme that the UK housing boom is showing signs of fading.

Annual house price growth continued to soften at the start of 2015, slowing from 7.2% in December to 6.8% in January. This is the fifth month in a row in which annual growth has moderated, despite house prices increasing by 0.3% month on month in January.


Accordingly we see that an annual rate of house price inflation which peaked at 11.8% in June 2014 has now reduced to 6.8%. Care is needed with the precise numbers as different measures disagree on them but the broad sweep is true.  As well as the implicit boost provided to the UK economy from this there has also been an explicit one.

It is encouraging that the number of new homes built in England was up 8% in the year to Q3 2014.


From the point of view of the political cycle this may turn out to be a case of poor management as of course the government would have liked the boom to reach the May General Election.

Activity has fallen too

It must be awkward for an institution like the Nationwide which has such a vested interest here to publish these numbers but here they are.

The number of mortgages approved for house purchase has been around 20% below the level prevailing at the start of 2014 and surveyors continue to report subdued levels of new buyer enquiries.


Part of the reason for this is the change of Bank of England policy from the “full speed ahead” of Funding for (Mortgage) Lending to the “icebergs ahead” of the Mortgage Market Review. Also as even the Nationwide implicitly admits many houses are simply too expensive now.

After taking account of seasonal factors, UK house prices are currently 2.4% above their precrisis peak.


As we know that real wages have fallen by around 10% (depending on inflation measure used) in the UK over the same time period houses have got more expensive. Even the Nationwide admits this with an earnings to house price ratio of 5 for the UK. I also note that London has risen to a stratospheric level of 9 on this measure!

UK credit conditions

So the Bank of England is none to keen on secured credit growth. However the Financial Planning Committee then looks rather foolish when we consider today’s data.

Consumer credit increased by £0.6 billion in December, compared to the average monthly increase of £1.0 billion over the previous six months. The three-month annualised and twelve-month growth rates were 7.2% and 6.7% respectively.


Excellent! So we slow secured credit so we can expand unsecured credit to make the system safer and more secure. Oh hang on….

The FPC is showing itself to be as clueless as it is anonymous. Having passed a member of the FPC in Battersea Park recently I think that might make me pretty much unique in knowing who she was! I do have an excuse as I used to work with her.

Meanwhile we are supposed to be pushing bank lending to businesses to new heights so let us take a look at it.

Loans to non-financial businesses decreased by £3.8 billion in December, compared to the average monthly decrease of £0.8 billion over the previous six months. The twelve-month growth rate was -2.8%.


Oh not so hot,still we know that small business loans are the priority of the new reformed Funding for Lending Scheme so they must be surging?

Within this, loans to small and medium-sized enterprises (SMEs) decreased by £1.0 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelve-month growth rate was -2.1%.


Net lending – defined as gross lending minus repayments – to large businesses was -£3.8 billion in December. Net lending to SMEs was -£0.2 billion.


Let us just take a moment to remind ourselves of the official Bank of England view on this. From Governor Mark Carney.

The extension announced today concentrates the FLS on the one area where support remains warranted: the supply of credit to SMEs.


There is a long list of claimed boosts for small business lending on the Bank of England website which I shall spare you and instead I shall remind everyone again about the actual figures which have been falling time and time again. Perhaps Paloma Faith was writing a critique of the Bank of England here.

Ain’t got no pain (Ain’t got no pain)
I aint got no rules (Aint got no rules)
I think I like (I think I like)
Living upside down (Living upside down)


So in summary the Bank of England is presiding over something of an unsecured credit boom whilst lending to businesses including the crucial small and medium-sized ones continues to contract.

What about interest-rates?


If we recall the words for former Bank of England Deputy Governor Charlie Bean that savers have to take their share of the pain there is a certain inevitability in the figures below.

The effective rate paid on households’ outstanding time deposits decreased by 7bps to 1.73% in December and the rate for households’ new time deposits decreased by 4bps to 1.50%.


The 1.5% for new savings seems a little dubious to me frankly but I do agree with the fact that savings rates continue to be cut.

Mortgage Borrowers

Contrary to the MMR policy of the Bank of England we are seeing more interest-rate cuts here too.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 1bp to 3.18% in December and the new secured loan rate fell to 3.00%, a decrease of 10bps on the month.


A driving force in this has been the fall in UK Gilt (bond) yields which hit a new record low this morning for the ten-year benchmark of 1.39%. This impacts on fixed-rate mortgages most clearly and directly. Now of course this latest fall is after the figures we are discussing today but the downwards trend has been in place as 2014 started with it just over 3%.

Unsecured Borrowers

There have been some decent-sized falls here.

The rate on outstanding unsecured personal loans decreased by 2bps to 7.22% in December and the new unsecured personal loan rate decreased by 31bps to 7.27%. The credit card rate (all balances) fell to 10.36%, a 31bps decrease on the month.



There is much to consider here as we look at how the Bank of England is controlling credit policy. It has trumpeted its efforts to slow down the mortgage market which had an effect although as we look forwards we wonder if lower mortgage rates will reinflate things. However as we observe a boom in unsecured credit combined with further reductions in business lending we see that Paloma Faith is right about it all looking upside down.

Meanwhile elsewhere much is happening and I would like to add a couple of snippets. Firstly Spain backed up my analysis of yesterday by declaring GDP growth of 0.7% for the fourth quarter of 2014. If we take that theme forwards then the Euro area annual inflation rate of -0.6% just released should not be firing off the media deflation klaxons in the way that it already has. I was interviewed on Share Radio this morning and will put up a link to the interview which covered these topics when it is available.

Oh and I hope that the unemployment and employment numbers released today by Italy are more accurate than the ones Canada has been releasing!


16 thoughts on “Looking at unsecured credit growth and business lending means that Bank of England policy is “Upside Down”

  1. HI Shaun

    great article as always. With reference to the mortgage rate, I’ve just managed to remortgage @ 2.24%. So will this reduction in my mortgage filter back into the economy through increased consumption, nope we’re continuing to overpay 😉

    Another effect of the gilt market manipulation via QE today. BT have announced they’re paying 2bn into their pension scheme. 2bn less of investment/dividends for the economy.

    So, mortgages and investment, both impacted by QE.

    • Hi Anteos and thank you

      You reply has highlighted two of the problems with QE that seems to slip the minds of its apologists. Firstly whilst some people have spent there savings others have saved more both explicitly and implicitly as you have by overpaying your mortgage. The pension deficit issue is not well understood either but in essence lower bond yields raise the final salary deficits which means that companies like BT end up having to divert funds to make up the “shortfall”.

  2. How much the Funding for Lending SME designated money is actually going to real businesses, and not cheap mortgages for Buy-to-Let investors who are snapping of tens of thousands of starter homes?

    • Hi Paul and welcome to my corner of the blogosphere

      That is a question I am sure many of us have wondered about?! Getting such data from the Bank of England would be the equivalent of pulling teeth with no anaesthetic I think. Maybe a freedom of information request would squeeze it out.

  3. Great column, Shaun, as usual.
    Here is a link to a survey article on the problems with the Canadian Labour Force Survey.
    Unfortunately it does not mention the specific problem with the measurement of the self-employed, which is detailed in another Globe article:
    As one of the comments to Mr. McKenna’s article notes, StatCan revised the job growth in my own province of Ontario for 2014 from 80,000 down to 38,000 jobs, about three quarters of them part-time. We had an election in this province in June, when data to May was available, and the Liberal government was re-elected, going from a minority to a majority. Now it seems that a lot of the jobs the government bragged about creating never existed.

    • Hi Andrew

      You make a point that has the potential to become quite a scandal! Should it be discovered that the errors were systematic or how shall I put it? Encouraged……Then it is a really big deal. Of course care is needed as in general I ascribe to the cock-up theory of life more than the conspiracy one and the errors could easily be innocent. But a thorough enquiry is needed and not one of the Sit Humphrey Appleby or indeed Chilcott variety.

      Oh and I nearly forgot to add that statisticians the world around struggle with the self employed dont they?

      Also I have commented on the Chris Giles CPIH “improvement” aka disaster article in the Financial Times. Strange he forgot/omitted his own role….

      • I’ll subscribe to the cock-up theory, when there is no more than statistically impossible differences in the errors helpful and unhelpful to those making them.

  4. I’d posit that the BOE policy is actually a political motivated stance and the Governor of the BoE should be therefore be an elected post – much as you have put forward , Shaun.

    BoE is driving by the large debt of the HMG and that the failing Banks are still just that , failing ( and un-trusting of each other , except perhaps the Swiss banks ! )

    For the UK economy until the tax revenues grow to cover the spending ( or spending drops ….) then we will be all in the poo for quite sometime

    As for the balance of payments , what happened to re-balancing the economy ? Lower mortgage rates do not achieve that at all

    Perhaps its really all land prices / asset protecting as a poster put it yesterday , the Duke of Westminster must be laughing …..


    “All crisis have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.”
    ― John Kenneth Galbraith, A Short History of Financial Euphoria

    Ps: he hasnt much to say about popcorn though …..

    • Hi Forbin,

      Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.
      John Kenneth Galbraith – “Recession Economics”

      Substitute popcorn for oats and we have us a winner!

  5. Hi Shaun, another good piece again, thanks.

    In New Zealand things really are upside down. From the New Zealand Herald, following the Reserve Bank’s decision this week to leave the OCR (Base Rate) at 3.5% …..

    “The Reserve Bank of New Zealand dropped its explicit reference to a tightening cycle for interest rates, saying inflation could turn negative before returning to its target band and the official cash rate may be raised or lowered dependent on economic data flows.”

    MSM opinion about the next move is divided, but the fear is that a reduction in rates will add fuel to the housing market which in Auckland already looks very hot to me.
    Average price/income ratios ( for December ) are :
    Auckland City 9.3
    Auckland metropolitan 8
    All NZ 5.5

    About 1.4 million people live in Auckland metro out of a total NZ population of 4.5 million.

    • Hi Eric

      Thanks for the numbers. I knew there were house price issues in New Zealand but did not realise that there are quite that acute. Auckland is not that far off the measures for London! Are there foreign buyers in evidence like in many other major cities? Also what about all the space you have down there compared to London/UK is the plenty of new building?

      This from the RBNZ doesn’t quite cut it does it? “The housing market is showing signs of picking up, particularly in Auckland. “

      • Hi Shaun,
        There’s little doubt that immigration is a major factor in the Auckland housing market.
        The construction industry is of course skewed by the Christchurch rebuild. It’s affected capacity, costs and insurance premiums.

        In the 1980s the house affordability ratio was around 3. It used to be easily possible to buy land, build a house and sell it for a profit. Not any more. Now land prices, building costs, development costs (eg mains services) and the multitude of local authority charges and fees all conspire to push finished property costs higher than market values. So there’s a widely-held belief that building more homes at prices people can’t afford will not solve the problem.

        I think the comment from the RBNZ was an attempt to compare today’s market with the downturn it managed to create by introducing restrictions on loan-to-value mortgages a couple of years back. Now there’s talk of the Bank introducing loan to income restrictions of 4.5x if interest rates fall.

      • Shaun,

        Low build densities mean that greenfield sites usually mean long, congested commutes (Auckland was smaller in 1980s, when I lived there). The train network is pathetic and is of little use.

        I think Auckland affordability has been awful since the late 1990s and concluded then that my PPP was at least double in England’s South East compared to Auckland.

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