“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

28 thoughts on ““All bets are off” as the Bank of England holds a “secret” press conference

  1. Hi Shaun, your experience shines through here, Andrew Bailey never signed up for this did he. And if I remember Carney’s circus with the French synchronised swimmer were ready to splurge capital money printing to solve the Global warming pandemic.

    Then another virus epidemic is emitted from the French lab design, shared most generously from Lyon but of course not built quite correctly by the Chinese constricution professionals, postive pressure instead of negative pressure…

    So we have an unfortunate contradiction here, rates are lower to help people buy houses with cheap debt but suddenly the Banks let loose a concern about proces stability… but no that is not possible. That house prices coudl fall. I am ready to sign-up. I will take £100-500K if the bank will pay me each month to have the money… its better than saving.

    Should be interesting this announcement.

    • Hi Paul C

      It turned out to be rather a damp squib. In essence it was the media quoting Governor Bailey and more worryingly the absent-minded professor Ben Broadbent. Not much of significance was said with the only real thing of note was Ben Broadbent directing people to the labour market figures proving he has learnt little or nothing from his mistakes in the summer and autumn of 2016.

      So it was really rather badly handled and the £ lost around 1%…..

  2. The secret press conference is alarming and smells of radical measures to me, if not at 12.am may be some forecasts to come.

  3. Great article as always Shaun.

    The pliant media have been doing their best to extoll the virtues of QE. Without answering the question, that if it works, why do they keep having to do it:

    https://www.bbc.co.uk/news/business-15198789

    The boe are like a one hit wonder, they only have one solution (now that base rates are at rock bottom) and thats firing up the printing presses.

    People are losing jobs, furloughed or battening down the hatches, I’d be very surprised if the boe can force the consumer to spend. Even with NIRP, it just won’t happen. But they won’t realise that in their ivory towers with their RPI linked gold plated pensions.

    • Hi Anteos

      Good spot as you are right as we only get a vague reference to cheaper borrowing for companies but clear pointers to downsides such a benefiting the 1% and the effect on pension funds. I do hope some of the comments pointed this out. Also there is the way Bank of England research on Bank of England policies is quoted. We would all love to do that!

  4. Hello Shaun,

    re “These days central banks and governments are hand in glove. ”

    you forgot the word “openly” …….;-)

    Forbin

  5. Hello Shaun,

    so a WAG here

    BIRP say -0.25% , freezing of savings accounts and cash with drawls from banks ( or limited to £250 per week , not per transaction) .

    Bail in on any one with money on account above the £85,000? this might not be done as it may affect parents helping their children buy houses – perhaps link it to such a thing , ie if you lend it out for housing you can have it or we’ll just keep it safe from you, sorry, for you …..

    Forbin

    PS: I’m getting ads now for upto 50% of furniture !! wowzer if the HMG lends me the money at minus 0.5% what could go wrong ?

    eheheheh

    • Hi Forbin

      It is a bit like the free £50K for a year for some smaller businesses. Why not take it? Back in the day my father would have been grateful for it, but I doubt it would have changed his view of the banks.

      • A point that I too have made, especially concerning interest rates.
        Some years ago, I made the point on here that saving is for security, rather than for purchasing, and that punitive interest rates, with the insecurity they promote, are counter-productive

        • As I said recently, I think a lot of this nonsense has to do with the early career years of many of these people, so they think that by ramping up house prices, people will withdraw the equity and go on a spending bender as they did in the late 80s. However, rates were much higher then and the economic weather seemed pretty good, so people were confident they could pay it back or get more equity from rising house prices. Trouble is, even that credit explosion blew up quickly.

  6. Well, quelle surprise – seems the “secret” press conference was entirely obvious and no doubt secret to avoid awkward questions like: why will it work this time?

    The fact that it is labelled “secret” really means it has been hastily arranged after the Nationwide dropped a bomb into their schemes yesterday to tell us what we already knew – there are problems ahead with both prices and repayments in the housing market. Once below the liquidity trap, the actual rate will make little difference as FOMO means panic buying is being encouraged. So, it is the other key factors that matter – availability of credit (taps closing off with the Nationwide move) and consumer confidence (that multiple again). More QE will not affect these any more than it affects consumption demand.

    In the ultimate irony, the BBC taking their orders from Cummings these days, cannot even get the nonsense that is we right. Their diagram claims that bond purchases will make companies and consumers borrow, which then reduces rates.🤪 Faisal needs a slap.

    Only positive sign is that Andy Haldane has finally seen the light and voted against. The rest are clearly channeling the spirit of Steve.

    • Hi Dave

      It was all quite a mess as they unsettled people with talk of a secret press conference, only for it to turn out to have not much to say. They did not invite everyone as someone I chat to who is normally at the conventional pressers did not get an invite. Meanwhile the UK Pound £ is 1% lower on the day.

      I do contact Faisal Islam from time to time but he seems to prefer politics and covers that far more than economics, which is disappointing. BBC economics coverage is very thin when it exists at all.

    • “the BBC taking their orders from Cummings these days”

      You must be joking; the MSM hate Cummings psychotically because he helped deliver Brexit.
      They are taking orders from tptb, Cummings’ deadly enemies.

  7. Hmmm …. I wonder what secret meetings will do for the pound, oh my! i is falling heavily against the Euro and the dollar, who wudda thunk it!
    It’s almost as if every policy or statement from the Bank of England is designed to weaken sterling further, nah that’s tin foil hat wearing nonsense, must tune in to the multi-culti, LGBTQ+,PC, diverse non fake news BBC news tonight so they can explain what it all means to me.That nice Kamal Ahmed their economics editor with his nice degree in Political Science will put in terms the man in the street can understand – inflation good- deflation bad, higher inflation better, QE good for housing market, lower interest rates to help industry and unemployment and first time buyers.More must be better right?

  8. Off topic China finds heavy coronavirus in food suggesting Salmon could be the carrier and today 100 workers in 2 Sisters food processors tested positive !!!!

    “Health Minister Vaughan Gething said the Anglesey outbreak was a “concern”.

    “2 Sisters has suspended production and closed the Anglesey chicken factory, which supplies local authorities, hospitals, restaurants and small businesses, following the outbreak.

    The company supplies food to KFC and supermarkets including Marks & Spencer, Aldi, Asda, Co-op, Morrisons, Sainsbury’s, Tesco and Waitrose.”

    https://www.bbc.co.uk/news/uk-wales-53091149

    2 Sisters supplies about a third of UK chicken.

      • A slightly more prosaic explanation (speaking as a vegetarian who gets by on a diet of “very artificial” synthetic meat) is that these food factories have appalling conditions with workers packed very tightly together and as it’s a noisy environment they often have to shout to communicate, which is great for spreading virus. Since Upton Sinclair wrote The Jungle in 1906 about dirt-poor Lithuanian migrants working in meatpacking in Chicago, I’m not sure how much social progress has been made. Judging from this Guardian article it’s largely been one immigrant taking the lowly place of the last – seems to have come around to Central Americans these days, with Mexicans generally having moved on to better things: https://www.theguardian.com/world/2020/may/02/meat-plant-workers-us-coronavirus-war

        Funnily enough a client of mine showed me round their rather gruesome sausage factory on an outer London industrial estate slightly before the Brexit vote… Staffed almost entirely by Lithuanians. Plus ça change, or however the Balts say it!

        • If you were right, “MyBurningEars”, they’d all have got it by the peak of the curve or before.
          Are you suggesting that there is a very good case for chlorinating chicken?

          • https://www.wired.co.uk/article/coronavirus-super-spreader-events-uk

            “Superspreading” events mean about 20% of infected people cause about 80% of transmission (what the epidemiologists call “overdispersion” and surprisingly close to the version of the Pareto Principle widely publicised by the management consultant and author Richard Koch).

            A consequence of this level of overdispersion is that Covid transmissions don’t spread smoothly and continuously but rather do so stochastically – randomly and in big lumps. Incidentally this is one of the things that Prof Ferguson’s much maligned individual-based model got right (it’s why his final results have to come from resimulating the outbreak many times and taking an average – chance events can substantially alter the course of the epidemic) and the more basic deterministic compartmental models that some countries used for prediction get wrong. This is why it isn’t as simple as thinking “big easy targets for Covid should all have been hit by the first peak”. By chance many of them will get through the peak quite unscathed – it’s a lottery but even at the peak sufficiently few people were infected that many large indoor congregations of people could “get away with it” of their luck held. Indeed only a small minority of people seem to have ever been infected yet – optimistically that’s a sign things didn’t get as out of control as they might have done, pessimistically it’s a warning that plenty more kindling exists to fuel the fire. Even once infection numbers have subsided, one instant of bad luck can seed another hundred inflections – these food factories are particular vulnerable but I would suggest steering clear of indoor choirs for many months to come!

        • Indeed I believe you are correct. The virus is more persistent in cold and damp preservative conditions (than hot and dry). Meat preparation, carcassing involves close practitioner work as limbs are passed between operatives for tertiary operations. As you say close proximity, noisy conditions lead to shouting and singing and banter.

          I guess its possible the meat itself spreads the virus, but the shopper would have ot practice bad hygiene, licking the wrapper, not washing hands between veg and meat, prep and not cooking the meat.

          My money is on the people who working the factories spreading it to one another and young (eastern european) workers maybe be without symptoms leading to a peak within a factory until it finds suceptible targets and the authorities notice sick people in numbers.

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