It was only on the 23rd of last month that I looked at cracks becoming fissures at the Bank of England. It is in the news again but before we get to the land of confusion that is the current state of Forward Guidance let me take you back to one of the earliest themes of this website. It was the large gap between official interest-rates and those both paid and faced by the ordinary individual. I was reminded of that as I read about the Institute of Fiscal Studies report on student loans.
The use of RPI + 3% during study – currently 4.6% nominal but soon to rise to 6.1% in September – results in students accruing £5,800 in interest during study.
Students may quite reasonably wonder at the expanding gap between the rate of interest they are liable for and the 0.25% Bank Rate of the Bank of England or a thirty- year Gilt yield that has spent quite some time below 2%. Part of that is something we have looked at many times before where the “not a national statistic ” RPI becomes useful to the establishment because it gives a higher number. According to the IFS this shuffle between RPI and CPI if combined with the other changes might cost higher earners £40,000 although there are various assumptions involved there including the one that the debt gets paid.
It was only a few days ago that I looked at the ongoing rise in unsecured credit. Whilst some of it reflects cheap car loan and leasind deals I noted that credit card interest-rates at 18% are pretty much where they were before all the interest – rate cuts. As were the loans and advances in the other categories. Of course we face a contrary situation where some get offers of 0% to lure them in as others pay the 18%.
This is another problem area for Bank of England Governor Mark Carney after his extraordinary claim that car loans are secured debt. I do not know if the Daily Mail is correct to claim that cars worth £20,000 are being offered to the unemployed, those on low wages, or those with poor credit ratings. But I do know that the area of sub-prime lending needs to be closely looked at.The amount of so called PCP or Personal Contract Plan lending has soared meaning car loan debt has rien from £28 billion in 2012 to £58 billion and rising fast in 2016.
This area is especially awkward for the Bank of England as its surge has pretty much coincided with its Funding for Lending Scheme which was supposed to boost lending to smaller businesses. Did they mean car dealerships?
A Lost Decade
As we mull the fact that the last Bank of England interest-rate rise was 10 years ago today I note that policymakers are currently engaging in a tug of war on the subject of interest-rates. On the one hand we have Iam McCafferty who is having a third go at trying to raise interest-rates. Third time lucky? Whilst indulging in the current policy maker fashion of a trip to Wales he told the Daily Post this.
“We made the last interest-rate cut from 0.5% to 0.25% after the EU Referendum result when it was felt a stimulus was needed. Since then the economy has not slowed to the extent we feared last summer and meanwhile inflation has been high.”
He thinks it would be “prudent” to raise rates and “that there is a need for change ”
When Doves Cry
The ying to McCafferty’s yang has come from former hedge fund manager Gertjan Vlieghe. In an interview with the Independent he admitted that he had been wrong about both UK consumption and investment but I will add that he is also wrong about this.
“All of the decisions that have been made over the last few years have related clearly to the data.”
Sadly he was not asked what data justified last August’s move? The simple truth is that it was a self-inflicted panic move.
Looking ahead this bit revealed Gertjan’s true thoughts
You have very weak wage growth for households
It is fascinating to look back to an interest-rate rise from 5.5% to 5.75% isn’t it? That move a decade ago looks now like it was from one of those reversed universes that the crew of the Starship Enterprise visited every now and then. As to now I note that the Financial Times tells us this.
The Bank of England is now closer to a rate rise than any time in the past 10 years
That is not what it was telling us when it was telling us that Mark Carney was “rockstar” central banker and he was giving Forward Guidance about interest-rate rises “”sooner than markets currently expect”!
If we look at this week’s data I note that whilst the UK economy is growing all of tbe PMI numbers for June were lower than for May. They suggest the economy is growing at a quarterly rate of 0.4%. If we add in this morning’s update that productivity fell by 0.5% in the first quarter of 2017 I think the Bank of England will find plenty of excuses not to raise rates.