Negative Interest-Rates cannot stop negative household credit growth in the UK

This morning has opened with something which feels like it is becoming a regular feature. This is the advent of negative bond yields in the UK as we become one of those countries where many said it could not happen here and well I am sure you have guessed it! The two-year bond or Gilt yield is -0.07% and the five-year is -0.03%. As well as the general significance there are particular ones. For example I use the five-year bond yield as a signal for the direction of travel for mortgage rates especially fixed-rate ones. If we look at Moneyfacts we see this.

Lloyds Bank had the lowest rate in the five year remortgage chart for those looking for a 60% LTV. Its deal offers 1.35% (2.8% APRC) fixed until 31 August 2025, which then reverts to 3.59% variable. It charges £999 in product fees and comes with the incentives of free valuation, no legal fees and £200 cashback.

A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?
If we switch to the two-year yield it is particularly significant as it is an implicit effect of all the Bank of England bond or Gilt buying because it does not buy bonds which have less than three years to go. So it is a knock-on effect rather than a direct result.

QE

The total of conventional QE undertaken by the Bank of England is £616.3 billion as of the end of last week. The rate of purchases was £13.5 billion which is relevant for the May money supply numbers we will be looking at today. Looking ahead to June there has been a reduction in weekly purchases to £6.9 billion so a near halving. So as you can see there has been quite a push provided to the money supply figures. It is now slower but would previously have been considered strong itself.

Also the buying of corporate bonds which now is just below £16 billion has added to the money supply and I have something to add to this element.

NEW: The Fed has posted the 794 companies whose bonds it began purchasing earlier this month as part of its “broad market index” Six companies were 10% of the index: Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon  ( @NickTimiraos )

You may recall that the Bank of England is also buying Apple corporate bonds and I pointed out it will be competing with the US Federal Reserve to support what is on some counts the richest company in the world. Make of that what you will……

Engage Reverse Gear

This morning we have been updated on how much the UK plans to borrow.

To facilitate the government’s financing needs in the period until the end of August 2020, the UK Debt Management Office (DMO) is announcing that it is planning to raise a
minimum of £275 billion overall in the period April to August 2020.

Each sale reduces the money supply and I can recall a time when this was explicit policy and it was called Overfunding. Right now it would be a sub category of QT or Quantitative Tightening, should that ever happen.

Money Supply

We see that in a similar pattern to what we noted in the Euro area on Friday there is plenty being produced.

The amount of additional money deposited in banks and building societies by private sector companies and households rose strongly again in May (Chart 1). These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £52.0 billion in May. This followed large increases in March and April, of £67.3 billion and £37.8 billion respectively. The increase was driven by households and PNFCs, and continued to be strong relative to recent history: in the six months to February 2020, the average monthly increase was £9.3 billion.

The use of PNFCs is to try to take out the impact of money flows within the financial sector. Returning to the numbers we are seeing the consequences of the interest-rate cuts and the flip side ( the bonds are bought with newly produced money/liquidity) of the Bank of England QE I looked at earlier.

Last time around I pointed out we had seen 5% growth in short order and the pedal has continued to be pressed to the metal with a growth rate of 6.7% over the past three months. Or monthly growth rates which are higher than the annual one in May last year. All this has produced an annual growth rate of 11.3%.

Household Credit

This cratered again or to be more specific consumer credit.

Households repaid more loans from banks than they took out. A £4.6 billion net repayment of consumer credit more than offset a small increase in mortgage borrowing. Approvals for mortgages for house purchase fell further in May to 9,300.

I would not want to be the official at the Bank of England morning meeting who presented those numbers to the Governor. A period in a cake trolley free basement awaits. Indeed they may be grateful it does not have any salt mines when they got to this bit.

The extremely weak net flows of consumer credit meant that the annual growth rate was -3.0%, the weakest since the series began in 1994. Within this, the annual growth rate of credit card lending was negative for the third month running, falling to -10.7%, compared with 3.5% in February. Growth in other loans and advances remained positive, at 0.7%. But this was also weak relative to the recent past: in February, the growth rate was 6.8%.

Regular readers will recall when the Bank of England called an annual growth rate of 8.2% “weak” so I guess they will be echoing Ariane Grande.

I have no words

It seems like the air of desperation has impacted the banks too.

Effective rates on new personal loans to individuals fell 34 basis points to 5.10% in May. This was the lowest since the series began in 2016, and compares to a rate of around 7% at the start of 2020.

Mortgages

A small flicker.

On net, households borrowed an additional £1.2 billion secured on their homes. This was slightly higher than the £0.0 billion in April but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected more new borrowing by households, rather than lower repayments.

Looking ahead the picture was even worse.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

We wait to see if the advent of lower mortgage rates and the re-opening of the economy will help here.

Comment

I am sure that many reading about the UK money supply surge will be singing along with The Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Some will go further.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack
Monday morning, turning back
Yellow lorry slow, nowhere to go

Do I spot a QE reference?

But oh, that magic feeling, nowhere to go
Oh, that magic feeling
Nowhere to go, nowhere to go

There will have been some sunshine at the Bank of England morning meeting.

Small and medium sized businesses drew down an extra £18.2 billion in loans from banks, on net, as their new borrowing increased sharply. Before May, the largest amount of net borrowing by SMEs was £589 million, in September 2016. The strong flow in May led to a sharp increase in the annual growth rate, to 11.8%.

Of course it was nothing to do with them but that seldom bothers a central bankers these days. This next bit might need hiding in the smallest print they can find though.

Podcast

 

32 thoughts on “Negative Interest-Rates cannot stop negative household credit growth in the UK

  1. Excellent article. Since central banks have started intervening heavily in markets in the late 90s, one economic phenomenon has been very absent – mass unemployment. I think the fear over losing one’s job, and not being able to secure another one, is a game changer. That’s why people are finally starting to save money – just when the government wants them to go out and spend it.
    Banks have started withdrawing their first time buyer products but there are plenty of people where I live, who are now on their third properties, who are equally vulnerable to losing their job. These people have big mortgages; new cars on tick; extensions on tick; it’s all on tick.
    It’s clear the PM will do everything he can to prevent a house price crash; so I think we may be reaching the endgame – either a) massive stimulus, combined with infrastructure projects, to reverse unemployment and/or b) the government may set up a nationalised bank, which will buy up property from those unable to pay their mortgages, then charge them a smaller rent fee in exchange for the government taking equity in the property, and providing a floor under which prices cannot fall.
    So more financial engineering that will fail to solve the growing source of political instability in the UK – young people with no hope of owning their own property.
    On another issue, I’ve noticed gold and USD have both been appreciating, which is so unusual it may indicate we are reaching an endgame of something – the idea that central banks can control the Frankenstein that they have created.

    • Yes, indeedy. No one wants to think of end games and final conclusions because change is a challenge. A paradigm shift is necessary but there are so many tethered to the slowy rolling ball of calamity. I watch with nervous concern as old correlations are destroyed.

    • I’m just back from Next after taking an item back that i bought online, after this i went to Argos to collect some dumbbells and it was absolutely dead in both stores.

      But the rules i was given when walking into both shop tells me the govt don’t really want people shopping at the moment. Either that or the shops don’t want people shopping.

      I wonder how long shops can keep this up without going bust.

      • the rules seemed be ignored mostly in Camberley today.

        even those who had face masks had some poor quality types ( again )

    • “It’s clear the PM will do everything he can to prevent a house price crash; so I think we may be reaching the endgame – either a) massive stimulus, combined with infrastructure projects, to reverse unemployment and/or b) the government may set up a nationalised bank, which will buy up property from those unable to pay their mortgages, then charge them a smaller rent fee in exchange for the government taking equity in the property, and providing a floor under which prices cannot fall.”
      ________
      Or perhaps, when folk cannot afford to live in their home, they may have to sell it to Govt. & move into a “stack & pack” Agenda 2030 box, where, because they will be close to arterial public transport routes, life will be cheaper, what, with a car being unnecessary, and that will have the associated benefit of not having to solve the electrical generation gap, which would exist if ICE cars are replaced by e-cars.

      10 bn happy souls under UN “Happytalism”, note the lack of freedom as one of the goals…
      https://cloverchronicle.com/2020/05/24/shocking-united-nations-project-led-by-nelson-mandelas-grandson-hopes-to-achieve-a-new-world-order-for-humankind-by-2030/

      ..and this…
      11.Sustainable cities and communities

      But I’m just an irresponsible conspiracy theorist…

      • 8, Decent work and economic growth….

        the word “growth” means it’s not sustainable , so it’s more wishful thinking again.

        and what does decent actually mean? wishy washy words again.

        its a Mad , Mad ,Mad , Mad World…..

        so how do we divvy up the wealth?

        sit back and have some popcorn buzzin , the show is getting good…

        forbin

        • The show is beyond weird; now i expected the show to have an economic depression of sorts, but i never for one moment thought those creating the show would shut down most of the entire global economy to invoke this depression … and then continue to keep the economy shut for many more months than first suggested.

          Think i need an aspirin more than popcorn to get through this show.

    • John,

      I agree with everything you have said and although the government wants everyone tom spend they aren’t doing as that is evidence of worry about jobs and the economic outlook.

      At least the MP is doing something in creating some jobs but I think far more will have to be done and far more infrastructure jobs created.

      You could also be right in the banks eventually become landlords in the last financial crisis they took over assets so far as can remember.

      But whether all this will work is another matter the economic situation is worse now the banking crisis imo.

      What I cannot get my head around at the moment is the mortality rate on coronavirus the worse in the UK than anywhere else so why is that?

  2. Shaun, surely your post today is “tongue in cheek”? It said, “planning to raise a
    minimum of £275 billion overall in the period April to August 2020”, and its going to charge the buyers of these bonds a negative holding rate?

    But surely the ONLY buyer will the the BoE using printed electronic sterling… no one in their right mind would lend 300Bn to a UK that is in the self-acclaimed disaster zone and a Brexit on the way…?

    If ever there was a case for 5% coupons, it is now.

    • If you hold a bank deposit, with your bank holding reserve balances at the BofE, with the BofE holding a Gilt issued by the Treasury, you are ‘lending’ to the UK government just as much as if you had purchased that Gilt.

      Of course, the UK govt never borrows GBP, so you aren’t actually lending anything to it, but when it deficit spends it does so by issuing its own liabilities. Those liabilities (net financial assets of the non-govt sector) can only be govt issued money or govt issued bonds. Currently the govt is issuing far more money to the non-govt sector than bonds (because that’s what the non-govt sector wants). As the data shows, about £52bn of money was supplied last month.

      Those that are in receipt of that money seem quite happy to hold it even if they earn 0.01% on it (or use it to pay off debt). The government could pay them all 5% if it wanted to. There’s no need to, though.

        • well, this year, the govt is probably going to spend about £1trn. It does that by instructing the banks of the recipients of that spending to credit the recipients’ accounts. The banks then have their reserve accounts they hold at the BofE credited by the same amount.

          It”s also probably going to collect about £700bn of taxes this year. It dos this by debiting the bank accounts of taxpayers and the banks having their reserve balances debited by the same amount.

          The way it works currently, the DMO is also going to be selling £300bn of bonds to banks, which have their reserve accounts debited by £300bn, and the BofE will buy £300bn of bonds from the banks, crediting their reserve accounts by £300bn. It’s a completely unnecessary procedure, but it keeps some people happy.

          The result at the end of the year will be that there is £300bn more than there would otherwise be sitting in private sector bank accounts and there will be £300bn more sitting in banks’ reserve accounts. It is this £300bn of reserves that is the state money, or currency, created by the govt deficit spending.

          So in whose bank accounts will this £300bn be? Well, it starts off in the accounts of anyone who receives more from the govt than they pay in tax (the receipts will be from transfers and from selling goods and services to the govt). It’s quite easy to work out in general terms who this will be. Where those balances move to after that, is entirely at the discretion of those that received it.

      • if the government did pay 5%, wouldn’t government debt compound exponentially until it couldnt afford the debt repayments given persistent deficit. therefore the reason that CBs are /have been operating a form of ycc to slow this process down ?

        • the government can always afford any GBP amount it has committed to or chooses to pay.

          There might be a good policy reason to choose to pay holders of money more money just for holding money. I can’t really see what it is, but plenty of people will try to justify it. But the govt can always afford those payments if it chooses to make them.

          Remember a few years ago, George Osborne decided that NS&I savers above a certain age should be paid more than those below the age. So they were. It was a policy choice. NS&I is currently paying an average of just above 1% to holders of govt liabilities in the form of NS&I products, whereas holders of banknotes and coins get zero, holders of reserves (which can only be banks) get 0.10% and holders off Gilts get an average of about 0.3%.

          The ‘cost’ to the government of paying above 1% to holders of NS&I savings products is calculated by NS&I to be about £1bn a year compared to what the govt could pay on Gilts. So, there has to be a good policy reason to do this. I can’t see it myself, but it is a policy that has been enacted, so there must be a reason to do so.

          It could just be that holders of NS&I products all have votes and are likely to use them, Holders of Gilts, generally, don’t. Or am I being too cynical?

          • please can you expand on ‘the government can always afford any GBP amount it has committed to or chooses to pay.’ what is the mechanism for this? I am wondering why countries go bankrupt or experience hyperinflation if they can always afford any amount . if the BOE are truly indpendent when do they stop repairing the hole. it feels akin to a trader who tries to increase his bets to cover his losses until he losses control

          • The BofE is not independent of government. It is part of ‘the government’. It has day to day operational independence in certain areas, from other govt departments and agencies, but, that’s true of all govt departments and agencies. Its independence does not extend, however, to being able to “bounce the government’s cheques”., When Parliament authorises spending, it happens. Treasury instructs the bank of the recipient of that spending to credit the recipient’s account. The BofE credits the bank’s reserve account. The BofE cannot over-rule Parliament and prevent that spending.

            If, at the end of the day, that spending would take the Treasury account at the BofE overdrawn, the Treasury has three main options. It can:
            a) remain overdrawn. It has an unlimited overdraft facility at its own bank
            b) have the DMO sell a Bill to the banks. The banks can always ‘afford’ to buy the Bill, since they’ve just had their reserve accounts credited with the balance they need to settle the purchase
            c) have the DMO sell a longer dated Gilt to a non-bank entity. This is less likely at short notice and not really necessary, but if a non-bank wishes to purchase a Gilt, selling one will drain both the reserve balances and the broad money created by the govt spending.

            So the govt can choose to pay whatever interest on its debt it wishes. Hard to justify as a policy, though. It should probably choose just to pay zero

          • So no need to worry about credit ratings if your debt is in your own currency?

            So why would govts. “borrow” in anything else?

      • Robert,

        “Those that are in receipt of that money seem quite happy to hold it even if they earn 0.01% on it (or use it to pay off debt). The government could pay them all 5% if it wanted to. There’s no need to, though.”

        No because rates are only going one way down.

  3. Great article as always Shaun.

    Double whammy for the boe this morning. Their unoffical policy of creating debt serfs and mortgage slaves of the public is starting to fall apart. If kevin is right (and he usually is), they’ll start trashing the pound to increase poverty via inflation.

    Estate agents were adamant that the housing market would rebound and now it isn’t. Hopefully negative annual hpi will start to filter through in the next few months.

    • Hi anteos and thank you

      We knew that pumping up consumer credit was Bank of England policy when Governor Carney told us “this is not a debt fuelled recovery” a few years back. Now it is a story of two halves as some are still borrowing but more are repaying.

      As to the housing market there is no avoiding that these were not good numbers for the bulls. We have been hoping for a drop in house prices for some time there are plenty on the other side of the coin.

      • I was speaking to a colleague the other day. We were talking about how after the 80s/early 90s housing crash, our parents lived very frugally in order to keep their homes. Just from memory: as a family, we would perhaps go to a restaurant once a year; if we went on holiday, we would eat out only on the last night of the holiday; holidays were increasingly in the UK rather than abroad; there were undoubtedly more arguments about money – many couples would have divorced but worked out they couldn’t really afford it; in my case my mother went back out to work (a key worker – nurse) and her salary eventually overtook that of my father, who had remained in the private sector; looking back on this, I think it was all very, well, heroic – but it knocked the life out of them for a while.

        But looking at the house price vs earnings ratio now, it is so elevated in London and the South-East, I think even with such frugality, many people are going to struggle pay their mortgages. With remote working, people are going to sell up and move to cheaper areas. And the government is going to intervene with a state bank and buy the properties and lease them back. This indicates huge falls in house prices in London and the South-East and I think those falls will happen very rapidly as buyers start to walk away. I wouldn’t be surprised to see retracements back to not just the historical norm of 4.8 times earnings, but below that – maybe 3 times earnings. That would imply in some areas a drop of around 70 percent in house prices. No wonder the banks are not lending.

        For a long time I like many people assumed only an interest rate shock could cause a housing crash, but that’s because I forgot about mass unemployment. When the unemployment figures start filtering through as the furlough schemes unwind, the next stage of this crisis is going to be fears over basic job security. All hugely deflationary. It’s like the virus – you worry about it a lot more if someone you know is hospitalised with it; if someone you know has lost their job, you suddenly start to worry too.
        So who will win out of all this? Could it be the millenials, with their bitcoin and their gold, who in two to three years time will be able to buy a property off a distressed seller by trading in their alternative investments, without the need for much of a mortgage (if any) – the generation that is most digitally savvy and stands to benefit from the rise of home working and the acceleration of the digital economy? We will see!

  4. Just read that there is to be £1bn allocated to do up schools, is it me or is the building industry the one who only matters to this government?

  5. Shaun just a quicke

    I only see myself as having a simplistic understanding on economics and certainly well behind most posters here I have no qualifications whatsoever but did in fact think that gilts would go negative at some stage way back months ago after I joined your blog.

    Yes a “A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%.”….

    however I managed to take out a lifetime tracker at 0.39% above base with the Woolwich 13 years ago it was reviewed 5 years ago and extended and I seek to review again on the basis that although there was a limited time frame the financial ombudsman declared that life must mean life!

    The main downside so far as I can see is rates would not be going negative if inflation wasn’t to go negative as well, and that is bad news for borrowers as debt not being repaid.

    But the argument isn’t as simple as that !

    I remember when interest rates were in double digits and on guy was bragging to me what he was getting on his deposits in the bank in the 70S but inflation was still eating away his interest more so after tax.

    I remember buying a flat for just over £9,000 in about 1975 and four years later selling for £27,000
    so who was the winner the guy with his money in the bank or the property owner?

    Years after there was a property price crash but I never out presumably because the time I bought it was one of the best times to buy.

    As for the current situation no one really knows where all this is going to end Borris is now tryin g to get the UK economy by building and refurbishing schools.

    This will take time and more infrastructure is needed and more money will need to be borrowed but money is cheap at the moment.

    Some will lose and some will win that is the nature of economics, wirecard is causing pain in the UK it hits the poor again:

    https://www.bbc.co.uk/news/business-53222181

    • Shaun

      “A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?

      When rates used to go lower the banks tended to increase their set up valuation fees to make more profit, and I can recall some set up rates over the thousands so the rate above and fee above are probably very keen.

      But what does this seem to tell me?

      That rates are going to be low for many years to come as borrowing is very cheap at the moment but lets face it some countries have been paying to lend as you have mentioned a number of times in previous blogs.

      However what that tells me is some out there think assets are overvalued and a crash in world asset values will follow.

      All the above is down to gut reaction and a simplistic understanding of economics.

      • Hi Peter

        I thought you were building up to a question but then didn’t. Anyway you have done well with that mortgage advice. I gave some friends similar advice when the credit crunch hit as he had a flexible mortgage which was similar to yours ( Bank Rate +0.5% I think). Keep it because it had a lot of flexibility and that it would be ages before any interest-rate rises.

        Like you they have done well over this period…

  6. Quite a lot to talk about here, so I will start with my indirect employers, Lloyds – “ helping Britain prosper “ is the current slogan, which used to mean a focus on the U.K. and high street banking. However Antonio is under a lot of pressure over profits and with no margin in normal lending, they have headed back to wealth management, jumping into bed with Schroeder’s for active managements and those asset-strippers BlackRock for the passive management. Little margin in the latter, hence the advertising focus on Schroeder’s where they can charge bigger % fees. Still, they had the sense to dump Standard Life, who are pretty rubbish fund managers (and ageists to boot). Antonio gives it full guns on “diversity”, but has his mate and another middle-aged white bloke on the exec board! So, plenty of corporate bo***cks to cover the dash to the asset juggling to make money.

    On the govt debt sale sucking up the money created by the BoE, well, bears/woods and Pope/Catholic spring to mind, but it should at least confirm that inflation is unlikely as less of this funny money is getting into the real economy to lift consumption demand growth (although that is what they are claiming to do ….). The idea now is a shift from Modern Monetarism (because it doesn’t work) to leftie Keynesianism (to make work …. see what I did there.). Interesting of course that despite later misuse of his ideas, Keynes did only advocate a dose of public spending on infrastructure when the economy was really down the toilet, so with the increasing employment of fiscal measures, that must be where we are. Who’d have thought?

    The household credit position is likewise entirely predictable – as Alvin Hall says in his videos, bin the expensive debt (cards, overdrafts) and put it on cheaper products (can’t beat a house mortgage), so we are seeing a de facto rise in the marginal propensity to save, right at thend of 12 years of policies designed and failing to get us to spend our income plus some credit. The card is maxed out and so, on behavioural economics ideas, fear stalks the land and saving rises. The asset price rise designed to fire up consumer spending (an idea I think this lot are steeped in) has failed and as we have all said, if a drop of 6% makes no difference, why should another 1%? We are effectively as consumers pushing down on the second part of the credit equation by self-reducing the multiple/take-up, despite the fall in rates.

    So, we are just stuck in the Japanese mire, where effort and productivity to create consumption power as per Erhard is now replaced by everyone thinking they can make a quick profit/commission on assets like Lloyd’s. Johnson and Cummings are emulating Trump in shooting the messengers and ramping up the groupthink. What could possibly go wrong?

    • Yep, thirtieth year of the Japanese experiment to bail out the banks and not the economy, Japs let their stockmarket and house prices drop though, we seem to be determined to prevent either from correcting thus prolonging the suffering and misery, will ours last longer than 30 years?Nope, I think the west’s currencies will fail well before before that, The yen like their cars is indestructible by comparison.

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