The UK Money Supply numbers show rising unsecured credit and falling business lending again

Today is a day for examining the state of play of the UK monetary system as we peruse data on both lending and the money supply. But before I get to that something significant has taken place earlier this morning. The cavalry from India has arrived as this from the Reserve Bank of India indicates.

it has been decided to:reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect;

My first issue with this is the simple point that if the world economy is doing so well and is in a recovery why are so many places cutting interest-rates rates? It is almost as if they are afraid of something they are not telling us. Jeroen Blokland has put this on a map for us.

This is especially relevant in an article about UK monetary policy as the “Forward Guidance” from Mark Carney and the Bank of England is that an interest-rate rise or rises are on its/their way. If you deduct the from the countries in red on the map those who raised interest-rates because of currency falls you see that there is very little left and that the UK would be in danger of being as Brian Clough so memorably put it “in a class of one” if it raised Bank Rate. Is the UK economy that strong?

The other feature of this is that with RBI Governor Rajan India has a “Rock star” central banker just like the UK has with Mark Carney. Their “Rock star” has just cut interest-rates following a quarter where the official statistics tell us that the economy grew by 7.5% on a year before. Also I note that he thinks this of such a rate of economic growth.

Domestic economic activity remains moderate in Q1 of 2015-16.

Of course as the DnaIndia highlights there may be another issue.

Many economists suspect, however, that the government statisticians’ new way of counting GDP overstates how well India is doing.

Does anybody believe the new ways of counting Gross Domestic Product or GDP?

UK Money Supply

The UK measure of broad money supply used by the Bank of England is M4 excluding intermediate other financial corporations (OFCs). In case you are wondering about the number four we did have an M3 which became £M3 but ahem, it blew up. One of the factors back then was the way that building societies became banks for example with the word disintermediation to the fore. Returning to UK broad money it has been fairly stable for a while around the numbers below.

The three-month annualised and twelve-month growth rates were 4.0% and 4.2% respectively.

A rough rule of thumb is that this equals likely economic growth plus inflation. Currently that works much better if we use the Retail Price Index and economic growth rather than the Consumer Price Index. However for both measures we see that UK economic growth would be constrained by the pick-up in inflation which is likely with the oil price around $65 per barrel (Brent Crude). Actually if we put house prices into the CPI as I have long argued it would work really well right now but we would then have the problem that looking forwards the likely inflation pick-up (which began for example in Germany yesterday) would restrain economic growth. Perhaps that is what other central banks have been thinking as they have cut official interest-rates.

UK mortgage market

Interestingly it looks as though something is stirring again here.

The number of loan approvals for house purchase was 68,076 in April, compared to the average of 60,679 over the previous six months.

If we look for a driver of this it seems likely that the falls in mortgage interest-rates that we have been discussing are a factor here. The Bank of England has stopped driving them down so aggressively via its Funding for Lending Scheme but of course other factors such as the interest-rate cuts and monetary easing abroad have come into play. Thus we are also seeing a rise in remortgaging.

The number of approvals for remortgaging was 35,930, compared to the average of 32,308 over the previous six months.

Perhaps the overall background is a factor too. From This Is Money.

How to join the buy-to-let boom: Get started and pick the mortgage that’s right for you.

A recent report by economists showed that buy-to-let landlords have enjoyed incredible returns of nearly 1,400 per cent since 1996, beating all other investments.

If you put £1,000 into a rental property at the end of John Major’s government, it would have grown to £14,897 by last year, according to the research.

As the Outhere Brothers put it.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

Or as a current hit puts it.

Oh I think that I’ve found myself a cheerleader

With reports of “Irish Trophy Homes Are Back With the Property Bubble a Distant Memory on Bloomberg shall we misquote Prince and partly like its 2006/07?! What happened next?

Recently net mortgage lending has been stable at around £1.7/1.8 billion per month on average which compared to the past is low because whilst some have the tap open into the UK mortgage market another group are repaying as fast as they can. Repayments amounted to £15 billion in April as we mull two separate groups at play here.

Unsecured lending

The Financial Planning Committee set out to restrict the rules on risky mortgage lending via its Mortgage Market Review. Except that since in a predictable repetition of the past we seem to have got this.

Consumer credit increased by £1.2 billion in April, 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 8.2% and 7.2% respectively.

Up until the Funding for Lending Scheme was introduced unsecured lending was falling in the UK but growth began again and as you can see recently it is picking-up with a vengeance.

Loans to businesses

The whole purpose of the Bank of England FLS these days is supposed to be to drive bank lending to businesses particularly smaller ones higher so let us see how it is doing.

Net lending – defined as gross lending minus repayments – to large businesses was -£1.6 billion in April. Net lending to SMEs was -£0.2 billion.

Loans to non-financial businesses decreased by £1.6 billion in April, compared to the average of £0.0 billion over the previous six months. The twelve-month growth rate was -0.4%. Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.3 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelvemonth growth rate was -0.8%.

Hence the use of the word counterfactual which I note is not necessary when referring to mortgage growth or unsecured lending.


An analysis of the UK money supply and credit situation provides quite a bit of food for thought. As we look forwards and inflation rises back towards its target then we face the prospect that economic growth may slow. The situation is not helped by the fact that UK credit growth has been skewed towards the housing market and more latterly towards unsecured lending. Although of course it does allow bodies to claim that there is a bonanza now and even more of one just around the corner. From Legal and General yesterday.

has quantified the size and shape of the UK’s “Last Time Buyer” (LTB) market for the first time, and in doing so has identified 5.3m under-occupied homes in the UK, with 3.3m LTBs looking to downsize. The LTB market owns 7.7m spare bedrooms and a total of £820 billion of housing wealth, set to reach £1.2 trillion in 2020.

Wow! Can we mobilise this as after all we could pay off all the unsecured debt quite easily? Sadly life is not that easy and we have the issue of the fact that in spite of all the promises to the contrary there is little sign of credit growth for smaller businesses well apart from buy to let ones.

Where on this road does one see an interest-rate rise? A bit like a solution for Greece where we have been promised so many in the last week alone it seems to be a Mirage.

15 thoughts on “The UK Money Supply numbers show rising unsecured credit and falling business lending again

  1. Hi Shaun

    To my mind it’s been clear for some time now that Carney (like Yellen) is trying to take the heat out of asset markets by words and not deeds. Many indicators in the deveoped and developing World are now signalling a slowdown and talk of interest rate rises is just mere posturing. We are heading or a slowdown – or worse.

    In the UK, as you imply, the rises in GDP are being supported, or even created, by increases in lending and this, to my mind cannot go on ad infinitum.

    One interesting sidelight I read about last week in a note by Deutsche Bank was that the “consumption multiplier” from rental property was less than that for owner occupiers and that the sort of transfers we have seen in recent years way from OO to rental would affect the economy in an adverse manner (new OOs buy “stuff” whereas rentals don’t).

    • hi BobJ

      I’m not even sure we have had any growth at all . The Gerry Mandered figures we get with imputes on sex ‘n’ drugs ( what happened to Rock n roll ) and god knows what else they’ve pumped up the volume with make me wonder if we’ve been flat or even gone back a few tenths .

      Still you’re right on the good ole housing button keeped getting pressed , seems each time the cycle is shorter like Shaun pointed out – does n’t seem to deter them does it ?

      Well its the 2nd of June and oil has gone up since Jan but are still half the price approx from a year ago , seems the increase I was expecting is not as strong as I expected , which is actually good news but I suspect its because my demand “guess” was/is off . which leads into Shaun’s observation that with all these interest rate cuts going on that maybe we’re heading south again …….

      here , have some popcorn , the ride’s gonna be a good one !


    • Hi Bob J

      It is an interesting idea that the shift from owner occupation to renting property that has been going on has a deflationary impact. On an anecdotal basis it feels as though it is probably true doesn’t it? No wonder we are going to see more Right To Buy so that people move from the rented to the owner occupied sector.

  2. Tis funny Shaun isnt it ?

    since when has debt been wealth ?

    “The LTB market owns 7.7m spare bedrooms and a total of £820 billion of housing wealth, set to reach £1.2 trillion in 2020.”

    housing wealth my buttocks ! thats just even more debt that has to be paid off with real earnings …….. ( and I’ve not given into this yet , your house is your home , only if you can downsize and who can ? kill off family members ? take a look at mum and dad still having their old kids still living at home due to the fact they cannot get on the mortgage rat run! )


    • Hi Forbin

      I meant to point out in the article that the numbers in the Legal and General are open to serious question. How do they know there are 7.7 million spare bedrooms but lets not argue with that and assume they did some research. However the £820 billion is open to serious question as using a marginal price for a stock has obvious problems. How could you possibly sell it all for £820 billion let alone the promised £1.2 trillion in 2020?

      • How about we have a bedroom tax for owner occupiers?
        “Encourage” them to downsize, see wide-boy estate agents make a fortune, garner huge stamp duties, and see demand rise as savers are punished time-and-again.
        Neo-liberal dream.

  3. I’ve got a buy-to-let property that I let out for holidays. It is worth at least 3 times what I paid for it. I am told I have made a huge profit. No I haven’t! I haven’t sold it. Is that the game everyone is playing? Looking for a bigger fool to come along at just the right moment and sell it before a crash?

    If I have to sell to put food on the table I will. But to ‘cash-in’? If there is a reset then a house might well retain more value than the ones and zeros in a computer at my bank.

    If I think that way then a lot of others do as well. So we implicitly support all that is wrong with house prices in this country?

    • I bought my first house in 1987 and the second in 1996 both to live in. The value of my 1987 house had increased by 65% by 1991. However, after taking into account money spent down the years improving both houses and applying the RPI to the money spent throughout the years on improvements along with applying RPI to the original purchase prices it appears they have paced inflation plus about 0.5% over the long term although, as outlined above, because I bought right on the first house, had I sold it in 1991 I would have been told I had made a fortune (the speculative approach) but as I held for the long term the return was not good (but perfectly satisfactory given I only bought them to live in).

      I think this is the problem with the British housing fetish. When everythibng collapses everyone is silent when it shoots up to past highs everyone shouts they’ve made a fortune convenientky forgetting all the money they spent on improvements which of course you would include in your capital gains calculation if it were a true investment.

      • Indeed. I do not consider it much of a gain at all with all factors considered. However at nearly 65 I have all the numbers of my pension funds and the house has easily out-performed them all…if I sell at the right time! Much more fun rodding the drains of your pension than reading a dull pension statement each year.

        I am viewed as a ‘doom and gloom’ merchant. The housing crash that has not happened yet but has actually happened 3 times while I have been talking about it but which nobody else seems to have noticed! Mark Twain has a lot to answer for.

  4. Where would demand come from without debt?
    After 35 years, we have now reached the point where so many double incomes are needed just for a life of debt-ridden necessity, that only by imputing false wealth (housing equity) can people afford to borrow enough for a few diversionary pleasures from their debt slavery, and those diversionary consolations are never going to add up to pre-neo-liberal demand.

    • Hi therrawbuzzin

      Looked at like that the credit crunch as no surprise at all. Also I think that people were happy with the shift to two earner families when they thought that they were getting a better standard of living. Should the current phase continue where living-standard struggle rather than rise I think we will see more questioning that.

      The establishment will not like it as the extra workers not only GDP and taxes they of course employ childminders au pairs and cleaners giving matters yet another boost.

  5. Hi Shaun, it was always obvious that zero inflation couldn’t last long in the UK, at the end of the day commodities can’t keep falling otherwisw non will be produced, likewise the GBP can’t keep going up. I think we’ve reached the bottom point now on inflation and the next move will be up.

    A couple of comments and questions:

    “…the UK would be in danger of being as Brian Clough so memorably put it “in a class of one” if it raised Bank Rate.” – or 2, remember the Fed and think September/October.

    “Consumer credit increased by £1.2 billion in April” So the MMR worked then yes? Are you saying the stricter rules have pushed people into indulging in unsecured credit? If so I see no reason why someone wanting a house would start buying cars, motorbikes electrical goods etc. Can you explain?

    My explanation is something I alluded to the other year in a heatwave when you asked if I’d been in the sun too long. People are “thinking” themselves out of the gloom, they “feel” things are getting better so they feel confident to spend more and borrow more (of course things aren’t any better, – the massaged GDP figures including R & D and Coke & Hookers have been given a helping hand by the massaged inflation rate of CPI and the genuine falling commodity prices along with a high GBP although not any more in the last 2 cases). As inflation returns we will see “growth” shrink away.

    Have you given a thought as to why business borrowing keeps falling beyond the failyure of the FLS? I suggest that businesses aren’t borrowing because they’re not investing due to hesitancy about the future. They see all the Government effort and stimulus to achieve very little and wonder if after they have invested in new plant etc if they will be caught out as the Government finally runs out of stimulus ideas and demand falls back very quickly. You can’t beat a long term trend and I beluive the trend of falling consumption appearded in the UK probably in the early 2000’s but was masked by ever easier credit conditions, now, as they approach zero rates, then what?

    • Hi Noo2

      I haven’t forgotten the US Fed! Both it and the Bank of England will be hoping the other goes first, to the extent that the US bothers about foreign events anyway…

      As to the unsecured credit issue back in the boom days it was a way of boosting mortgage lending. So if a client was only allowed £x they were boosted by the size of the personal loan which at a later date was presumably swept up in the mortgage. I wonder if that is happening again…

      Also on a theoretical level it is odd to restrict lending with at least some security and then let lending with no security have something of a boom is it not?

      As to business lending there are various factors at play. FLS mark one if I may put it like that failed to realise that business lending is capital expensive and so that was an easy fail. Now that has been redressed I am not so sure that the banks want to lend to businesses as much as they claim they do. If we have reduced supply of loans combined with your theory that demand is lower then we are in a pickle.

      The reduced demand theory does also exist in the mortgage market as it took an extraordinary effort to get net lending positive and there are considerable sums repaid each month.

      Yet unsecured ending seems to have plenty of demand.

      • “Yet unsecured ending seems to have plenty of demand.” – cos it’s cheap and easier to get than a mortgage if we follow your theory re unsecured lending as a surrogate for mortgages which shows at best that demand has been flat lining for years.

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