We have been provided with some more insights into the thinking of the Bank of England via a speech from Executive Director Andrew Hauser. We open with a curious accident of timing.
I have always had a funny feeling about Friday the 13th – and 13 March 2020, Mark Carney’s last day in the
office as Governor of the Bank of England, was no exception.
Actually he had various leaving dates as one might expect from an unreliable boyfriend. Then the speech shows it is being given by a central banker because we are told this.
But this is no time for self-congratulation.
But then it apparently is.
Hailed globally as a shining example of how monetary, fiscal and regulatory policies
could work together to reinforce one another, the combination of interest rate cuts, government spending,
cheap funding and capital easing measures seemed sure to stabilise markets and restore some muchneeded confidence to households and businesses.
Can you applaud yourself whilst also slapping yourself on the back, but avoid self-congratulation?
We get a confirmation of one of my points.
The dollar swap lines may be the most important part of the international financial stability safety net that few
have ever heard of.
In essence the US Federal Reserve was effectively operating as the world’s central bank.
The events are described thus.
This was by far the largest and fastest single programme ever launched: equivalent to around a tenth of UK GDP, or 50% of the MPC’s existing holdings, and more than twice as rapid as the opening salvo of purchases in 2009.
The impact is described in glowing terms.
The impact was immediate, and decisive. Gilt yields fell back sharply as confidence returned, and market
functioning measures began to normalise . Purchase operations have since taken place
smoothly, with good participation and tight pricing.
There are issues with this though as we find ourselves noting that “as confidence returned” actually means that the Bank of England buys vast numbers of Gilts ( bonds). In fact the present rate of purchases at £13.5 billion per week means that few others need “confidence” as the UK has sold around £13.3 billion of new Gilts this week. So this week nobody else needed any confidence at all! Next is the yield issue where the Bank of England buying has driven short-dated Gilts into negative territory. I looked at the detail of the purchases on Tuesday and Wednesday and over 90% of the short-dated auction so around £2.9 billion was driving prices into negative yields which is apparently “tight pricing”. Also if I was being offered profits and in some cases enormous profits like this I think you might see “good participation” from me too.
Covid Corporate Credit Facility (CCFF)
Let me thank Andrew Hauser for reminding me of this issue and it led me down an unusual road. So in the style of children’s TV let me say to Arsenal fans are you sitting comfortably? First the details of the scheme and it is another bad day for those claiming the Bank of England is independent.
Given the credit risks involved, financial exposures and
eligibility decisions would be owned by the Treasury, but the scheme – to be known as the Covid Corporate
Credit Facility (CCFF) – would be designed and run by the Bank, and funded through the issuance of
reserves, with the MPC’s agreement.
What has it amounted to?
So far, over 140 firms have signed up for the scheme, and have borrowed over £20bn in total,
some of which has already matured. Firms’ borrowing capacity in the scheme is more than three times that
level , helping to underpin confidence – and complementing the Government-run schemes, including the Coronavirus Business Interruption and Bounce Back Loan (BBL) Schemes, which together have lent a further £31bn.
This is a tidy sum indeed and the independence crew take another punch to the solar plexus as we note that he is linking Bank of England work with HM Treasury.
Whilst the help is no doubt welcome yet again we see a central banker unable to see the wood for the trees.
First, CP issuance under the scheme has been at least three times
larger than the size of the pre-Covid-19 sterling CP market – and nearly three quarters of CCFF firms have
set up a CP programme since applying. So the CCFF has helped to deepen the CP market, with potentially
The Threadneedle Street Whale is in the market buying it all up! Who would not want to offer debt cheaply? Small and medium-sized businesses must be looking on with envy. It also gives us an addition to my financial lexicon for these times.
“the normalisation of conditions in core markets, ” means the Bank of England is buying.
Term Funding Scheme
This is reviewed in dare I say it? Self-congratulatory terms.
In addition to the CCFF, the Bank also opened the borrowing window for the new Term Funding Scheme
with additional incentives for Small and Medium Sized Enterprises (TFSME) on 15 April………There has already been £12bn of lending from the scheme – a far more rapid pace than the previous TFS.
Actually I would have expected more but of course the mortgage market is not yet properly open.
It does this by providing banks with cheap funding over
a four-year term (rising to six years for loans guaranteed under the BBL scheme).
So another one in 4 years as we note there is still £107 billion under the previous scheme?
Ways and Means
I looked at this on April 9th and concluded it was a minor factor which you might recall was very different to the mainstream media view.
The Ways and Means account has not been used since the financial crisis, and is normally worth £400m. But outside experts say that this will increase by billions, perhaps tens of billions to help the government manage a sharp increase in immediate spending,
I would suggest that Faisal Islam of the BBC needs some new “outside experts” as it has remained at £370 million and has therefore not been used.
We get some perspective from the scale of the interventions by the Bank of England which is described thus.
a balance sheet that has expanded by almost a third in three months, and will reach nearly 40% of annual UK GDP by
mid-year. To deliver that, we are doing more than ten times the number of weekly operations than in the
He calculates it as £769 billion and as the pace continues I think it is more like £789 billion now.
Next is something that he rues but I am more hopeful about as the lack of groups may reduce the group-think.
Face-to face meetings – the lifeblood of central banking, sadly – have been seamlessly replaced with audio and
Andrew Hauser clearly thinks about the situation but there is an elephant missing in his room which is how do we reverse all the central banking intervention and also deal with the side-effects? Have you noticed hoe the issue of the impact on longer-term saving ( pensions and insurance companies) has seen a type of radio blackout? Here are his suggestions.
First, do we understand why intermediaries struggled to make effective markets in core government
bond, money and foreign exchange instruments at crucial moments during the crisis?
Second, are we comfortable with the central role played by highly-leveraged but thinly-capitalised
non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify
instability so starkly?
Third, how do we deal with the risks posed to financial stability by the structural tendency for Money
Market and some other open-ended funds to be prone to runs, without having to commit scarce
public money to costly support facilities?
And, fourth, how can we ensure timely transition away from LIBOR, whose weaknesses were
highlighted so starkly by the crisis?
Still according to the Halifax Building Society house prices are (somehow) 2.6% higher than last May.