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.
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.