So Bank of England who will vote for an interest-rate rise after today’s data?!

Today has started with a reminder of a school of economics that I was taught about at university. The 1343 point or 7.71% rise in the Nikkei 225 equity index to 18,770 reminds us yet again that financial markets can move vastly more quickly than real economies as we wonder yet again what link that there  is? My subject of the day the UK is already seeing a 1.8% rise in the FTSE 100 to 6256 so congratulations to all equity investors overnight especially those in Japan. Time for the Rally Monkey I think.

Meanwhile in the real economy the Bank of England is meeting right now to discuss interest-rates with one of the nine ( yes nine like the Nazgul ) already having voted for an interest-rate rise. The vote is now on a Wednesday and is announced tomorrow at noon along with the meeting minutes so I hope that there are no leaks and that security is tight. This would be unlike the US Federal Reserve where one news agency released details around 20 minutes early recently.

Moving to the issues then whilst this was aimed at the US it would appear that it also applies to the UK. From the Financial Times.

The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.

So according to the IMF and now the World Bank the world economy is so weak it cannot take even a 0.25% increase in interest-rates in their opinion! How is the recovery going then?

The UK economy

Retail Sales

The British Retail Consortium has updated us quite a bit on the state of play here over the past 24 hours.

UK retail sales decreased 1.0% on a like-for-like basis from August 2014, when they had increased 1.3% on the preceding year. On a total basis, sales were up 0.1%, against a 2.7% rise in August 2014.

Some care is needed her as the August Bank Holiday rather confusingly was in September this year and allowing for that means that retail sales were probably up by 2% according to the BRC’s chief economist.

One factor that did continue was the fall in prices reported.

Overall shop prices reported deflation of 1.4% in August unchanged from July……On a 12-month average basis, the Shop Price Index reported deflation of 1.7%

Maybe for once their use of “deflation” is not completely wrong as the headline sales number fell but unless there is a real change in UK retail sales patterns then it is misleading. That remains to be seen although on the official numbers growth was declining in July.

House Prices

Maybe something is changing here and there is news today from somewhere rather close to home, at least for me! From Bloomberg.

Investors betting on making a quick profit on luxury apartments in south London’s Nine Elms district, Europe’s largest project for prime new homes, are facing long waits for buyers.

It is crane city up there and frankly as you pass it then any talk of UK construction output falling seems like from another universe. But I guess this is a consequence of the currency wars going on.

Malaysian investors, who purchased almost a third of the 866 homes in the first phase of the district’s $12 billion Battersea Power Station project, saw costs surge as much as 30 percent as the pound strengthened against the ringgit.

Whilst local property developments may not be that important they do matter if they turn out to be a guide to London overall as it is a forerunner to the rest of the UK. Via its Funding for (Mortgage) Lending Scheme the Bank of England went to a lot of effort to push house prices higher and will not like a prospective retracement or dip.

Industrial Production and Manufacturing

There have been signs of a declining situation here recently and sadly this morning’s data release has backed that up.

Total production output is estimated to have decreased by 0.4% in July 2015 compared with June 2015. Manufacturing fell by 0.8% and was the only main sector to have decreased. This was the largest fall since May 2014.

If we look into the detail we find out more about the fall in UK manufacturing.

The main manufacturing components contributing to the decrease between June 2015 and July 2015 were the manufacture of basic metals & metal products; the manufacture of transport equipment; and other manufacturing & repair.

In fact manufacturing was 0.5% lower than a year before which is a rather cheerless number. Overall production was up but this seems driven by the changes to the UK oil taxation structure introduced by the Chancellor.

Total production output is estimated to have increased by 0.8% in July 2015 compared with July 2014. There were increases in 2 of its 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 6.7%.

Who would have thought that UK production would be depending on North Sea Oil and Gas output which is supposed to be in decline?

Back of the first of this month I expressed my fears about the trends for UK manufacturing and I have put a link below.

The latest picture is summed up below.

In the 3 months to July 2015, production and manufacturing were 9.3% and 5.2% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

What about trade?

UK trade figures invariably require some sort of warning as you need to borrow the TARDIS of Dr.Who to find a period when they were consistently good. Today’s figures backed up the production and manufacturing issues discussed above.

Exports of goods decreased by £2.3 billion to £22.8 billion in July 2015, the lowest export figure since September 2010.

Indeed there was a direct link.

This is attributed to decreases in semi-manufactures (specifically chemicals) of £1.0 billion and finished manufactures of £0.8 billion.

One sector of exports was especially poor if we consider that the Euro area has been doing better.

Exports of goods to EU countries fell by £0.6 billion to £11.0 billion, the lowest level since November 2009.

The effect of all this factors is shown below.

The UK’s deficit on trade in goods and services was estimated to have been £3.4 billion in July 2015, a widening of £2.6 billion compared with June 2015.

If we look deeper for a little more perspective the situation looks better as previous to July we had been on an improving trend.

In the 3-months to July 2015, the UK’s deficit on trade in goods and services was estimated to have been £4.7 billion; narrowing by £4.1 billion when compared with the 3-months to April 2015.

In a nutshell the improving trend was reversed in July and the monthly numbers which are unreliable on their own were backed up by the production numbers. Indeed the Purchasing Mangers Index also has been hinting at such issues.

Companies linked reduced overseas demand to the sterling exchange rate, weak sales performance to the eurozone and the slowdown in China.

Is the higher value for the UK Pound £ beginning to apply a brake to things?

The Oil Industry

This seems to be in a very contrary position as whilst we are recording higher output this is also happening. From the BBC.

The contraction of Britain’s offshore oil sector has already stripped out 65,000 jobs, according to a new report.

The calculation of a 15% drop since the start of last year came from the annual economic impact report of trade body Oil and Gas UK.

More QE

The Bank of England has been extending the term or maturity of its holding this week in response to a maturity of a Gilt held. Today’s operation will involve the purchase of £1.4 billion of Gilts maturing between 2023 and 2028. Just to give you an idea of how far this now extends yesterday some £173.5 million of a Gilt maturing on the 22nd of July 2068 was purchased.


I will keep it short for today, after the data release who would raise their hands and vote for a Bank Rate rise? After all we are due a slow down if history is any guide…

In other news congratulations to the Queen and Wayne Rooney in a rather odd combination.

The Banks

As ever the “precious” is working against us. I will hand you over to Dan Davies who has been delving into the issue of regulation and banking.

An astonishing capitulation which IMO undermines the whole concept of TLAC

cetier1: HSBC and Santander win change to proposed capital rules

Seriously, if the FSB are allowing subsidiary capital to count for the parent, they should call it HLAC (Hopefully Loss Absorbing Capital)

Sorry for all the acronyms but I think that the underlying message and theme is clear.


34 thoughts on “So Bank of England who will vote for an interest-rate rise after today’s data?!

  1. Hi Shaun

    With regards the continual rolling over of QE, could this money be used for Government spenidng on capital projects instead, with very little detrimental effect?

    • Hi Jimbob

      As a first order event no as the money was spent back in the day and the Treasury and Bank of England are performing a dance around the financing. As a second order event Gilt yields are probably lower than otherwise so the government could use the “gain” for capital projects.

      To do as you wish then new Gilts would have to be issued with the Bank of England buying them which is pretty much Corbynomics. Then you could spend the money. It seems free and for small amounts it probably would, but as ever the risk is of a junkie culture building and the pain would be seen in the value of the UK Pound £.

  2. Counted 9 cranes in central Croydon this morning. A 4th mall and lots of flats.

    I live 4 miles from Croydon but would not dream of ever going there. Often walk the embankment from Battersea Park to Tower Bridge without a glance at the power station site. Maybe change my mind about both places…

    • Hi chrisrick

      The view along the embankment in Battersea Park is glorious although the pier where The Clash played London Calling live had rotted and was removed in the Millennium improvements. I sometimes cycle a fair bit of your route for City appointments and the Tate Gallery looks good too but on the other side of the river it is crane after crane and new development after new development

  3. Hi Shaun,

    Great article as always. Fascinating to hear about the nine elms flats. I was in london at the weekend (having left three years ago), and I’ve never seen it so busy. Kings cross station looks great. I remember looking at a flat in the area in 2005, and it was really dodgy.

    how does it work with the flats then? I thought the flats are resold about three or four times before the final occupier purchases them? Are the foreign speculators last in the chain then?


  4. Hi Shaun

    Frankly I don’t think the BOE would vote for an increase even if the situation was much better than you have stated. Let’s face it if you had been in a 50 year coma and had just wakened up and you saw people were obsessing about an IR increase of 0.25% from more or less 0% you wouldn’t believe it; would you have foreseen this situation when you were at the LSE; ZIRP; “emergency” rates for seven years ( an “emergency” is months: seven years is a war)?

    We have far too much debt and it is debt that keeps the Ponzi afloat and you do not deflate a Ponzi; it’s double down to the bust.

    Talking about the Fed they checked into the Roach motel years ago and they won’t emerge. They will, to my mind lose the remaining 5% of their credibility next week and become a laughing stock. Having said that they do in fact have an excuse. Some few months ago a reporter from the WSJ asked Yellen what conditions they would require to increase rates and she replied there were two: an increase in the labour participation rate and a better balance between full and part time jobs, that is more full time job creation. Both conditions have been going south since and she also said that only if those conditions were met would they “consider” increasing rates, not actually increase them. More weasel words from the weasel pack (not sure what the collective noun for weasel is).

    • Interest rates cannot rise as recent housebuyers will not be able to afford to service their debt.
      Why would anyone pay back debt when it’s almost free?

      • Hi therrawbuzzin

        Actually there is quite a bit of mortgage debt repayment going on but as one group does that more take out mortgages and there is also the boom in unsecured borrowing. Pre credit crunch the argument was that borrowers could not take a 0.5% rise in interest-rates and what I fear we have done is created that situation here but with interest-rates ~4% lower.

        • My apologies Shaun for my flippancy.
          Of course mortgage debt is paying paid down, as quickly as possible, by people very scared about the implications of future interest rate rises, and even moreso about the possibility of an end to churning.
          The thought of being unable to get the next 2/3/5 yr fix on your mortgage, and having to move to SVRs is, I would wager, causing many sleepless nights.

          It’s the area of unsecured lending I was really meaning.
          Interest rates are so low that many are “margin” borrowing. OK if you can immediately repay your creditors should conditions change…which I still do not believe they are likely to, at least, not voluntarily.

    • “….if you had been in a 50 year coma and had just wakened up and you saw people were obsessing about an IR increase of 0.25% from more or less 0% you wouldn’t believe it”. Yes, but, then again you’d be shocked to see inflation of about 1% (RPI) when it had been at about 12% when you went to sleep….

    • Doh!! and I retract that comment Bob J with apologies. I was researching historical RPI a few days ago and posted “12%” inflation from memory. Thought I’d better check and actually it was 4.8% in 1965 so yes I completely agree with you.

  5. Everyone (well economists!) seems to think a decrease in manufacturing is “a bad thing”. To my mind it’s good as we all globally consume far too much to the detriment of the planet. OK it’s not so good for the figures or the economy but somehow we will adjust to the new reality. It wasn’t so long ago (70s/80s? I remember everyone looking forward to an easier future and working less. Now another “bad thing” is part-time working. If workers were paid enough for their part-time jobs I’m sure many would be happy not to have to work so much.

    • I always thought interns were a great idea as well

      you work hard and I dont have to feed or house you , let alone pay you , on a promise of a job later

      donkey – carrot on a stick

      makes slavery so expensive …….

      maybe we would have had a better life but the masters decreed you needed to work and to work for the same wage as a chinese/indian peasant

      but you have the NHS – oh yes that has to go too

      global trade agreements that were for the 0.1% and not for us

      but you can borrow money to make up for it


    • Mummy’s wage just about covers the rent.
      Daddy’s wage just about covers everything else.
      How does that compare to 1970?
      Less work…lol.

  6. Shaun,
    You suggest that it might be the high value of the pound that is affecting the manufacturing sector. But have you considered that most of the problem might be high energy costs.
    I have read that Germany subsidies its high energy manufacturers, which would place the UK industry at a disadvantage and as against the Chinese, who are building a cheap cold fired power station every two weeks, it must be impossible to compete.
    The reduction in manufacturing in this country is not only bad for us (and the balance of payments), but does not affect the planet as it is merely relocated elsewhere.

    • “…who are building a cheap cold fired power station every two weeks…”

      WOW so cold fusion really works!

      we’re saved !

      ( yes I know you meant coal )

      and yes its impossible compete but our illustrious masters of the universe thought it would be a good idea …….

      global trade agreements without global standards of emissions and working practices

      guess why


  7. Great column, Shaun, as per usual.
    I noticed the quarterly owner-occupied housing (OOH) series based on net acquisitions were updated to 2015Q2 last week. They show a year-over-year increase in the OOH component of 1.9% in2015Q2 as opposed to 2.3% in 2015Q1. This compares to a 2015Q2 increase of 1.8% for the OOH component of CPIH, down from 1.9% in 2015Q2. The differences between the inflation rates for the two series are a lot greater than this summary would indicate. The year-over-year inflation rates for the OOH(NA) series are dragged down by the one-off changes made to the stamp duty rates, which helped drag down the quarter-over-quarter change in the acquisitions of dwelling component to -0.34% and the OOH total series to -0.36%. If one looks at the quarter-over-quarter change in the OOH(NA) series for 2015Q2, which is not affected by the change in stamp duty rates, it is 0.62% (2.5% annualized), which is considerably higher than double the comparable inflation rate for the OOH component of CPIH: 0.34% (1.4% annualized).

    • Hi Andrew

      I had seen the OOH NA numbers but had not thought through the Stamp Duty implications so thanks. It remains a better series than the rental one as you say but even so it has been neutered somewhat. I know you have sent the ONS similar enquiries to mine of this subject!

      In a way the OOH NA numbers are the best critique of the Johnson Report finding that CPIH should be the headline UK inflation measure.

      Oh and talking of indirect taxes there was a claim at the RSS meeting that they should not be in an inflation measure. Trouble is they do raise and lower prices…

      • Shaun, thank you for your reply. Yes, recently I complained to the lady who calculates the quarterly OOH estimates now that the renovations component was defective and there should be price surveys of renovation contractors that would take account of their profit margins. She replied that the methodology satisfied Eurostat standards, which is probably true, but really didn’t address my complaint.

        That is very interesting that indirect taxes came up at the RSS meeting. My own view is that any core measure of CPI should have the constant-tax CPI as its frame. Sure, indirect taxes are part of inflation, but if George Osborne dramatically hikes VAT rates, I don’t think the Bank of England should be raising the bank rate to get inflation under control.

    • Hi Forbin

      It would raise a wry smile if it turned out to be Warren Buffet would it not?! Actually I suspect he is too well connected these days to be caught out like that.

      Meanwhile the action is the other way on the other side of the world.

      “Official Cash Rate reduced to 2.75 percent
      Date 10 September 2015
      Statement by Reserve Bank (NZ) Governor Graeme Wheeler:

      The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 percent.”

      Perhaps they are not so sure about the Rugby World Cup…

  8. Also Shaun I guess the expect cashing in of pensions to buy housing hasn’t yet taken off

    you really do get more money by renting than from the pensions companies these days

    we all know why ……

    next chapter , the Great Pensions Scandal !

    watch this space !


    • Hi Forbin

      I have a friend who is an IFA and he is very worried about such developments. What pension advice can he give? What might he get sued about later? Of course those are only problems for the bona fide as the gamblers do not care.

      Another mess is brewing.

  9. By the way, the Bank of Canada announced that it would keep its overnight rate at 0.5% today. The press release makes the following claim: “Core inflation has been close to 2 per cent, with
    disinflationary pressures from economic slack being offset by transitory effects of the past
    depreciation of the Canadian dollar and some sector-specific factors.” Anyone who read that would never guess that core inflation as measured by the BoC’s operational guide, CPIX, went from 2.3% in June to 2.4% in July, and that it has been above the 2% target rate from August 2014 on. Canada has much the highest core CPI inflation of any country in the G-7, and it must be one of the highest in the G-20.

    • Hi Andrew

      Something of a central banking nirvana with inflation just above target.They must have been doing handstands and back flips at Jackson Hole…But misrepresentation of both inflation levels and trends is a central banking tool these days. Meanwhile as I have replied to Fobin the Kiwis are on the march.

      “Official Cash Rate reduced to 2.75 percent
      Date 10 September 2015
      Statement by Reserve Bank Governor Graeme Wheeler:

      The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 percent.”

  10. I am no economist, and there must be an answer to this, but I have to ask.


    – a persistent and substantial trade deficit
    – a declining manufacturing base, and (as I recall from earlier blogs) little growth in loans to businesses
    – flat retail sales and falling retail prices
    – a Government pursuing an “austerity” agenda

    Where is the GDP growth coming from?


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