Overnight there has been quite a shift in economic sentiment. To some extent I am referring to the falls in equity markets although the real issue is the new lockdown in France and increased restrictions in Germany. As we have been noting they were obviously on their way and the Euro area now looks set to see its economy contract again this quarter. It will be interesting to see how and if the ECB responds to this in today’s meeting and these feeds also into the Bank of England. The UK has tightened restrictions especially in Northern Ireland and Wales as we now wonder what more the central banks can do in response to this?
Still even in this economic storm there is something to make a central banker smile.
LONDON (Reuters) – Lloyds Banking Group LLOY.L posted forecast-beating third quarter profit on Thursday, lowering its provisions for expected bad loans due to the pandemic and cashing in on a boom in demand for mortgages.
Britain’s biggest domestic lender reported pre-tax profits of 1 billion pounds for the July-September period, compared to the 588 million pounds average of analysts’ forecasts.
Few things cheer a central banker more than an improvement in prospects for The Precious! But we can see that there is also for them a cherry on top of the icing.
The bank booked new mortgage lending of 3.5 billion pounds over the quarter, after receiving the biggest surge in quarterly applications since 2008.
That links into the theme of monetary easing which of course is claimed to help businesses but if you believe the official protestations somehow inexplicably ends up in the housing market every time. So let us look at the latest monetary data which has just been released. Oh and one point before I move on, what use are analysts who keep getting things so wrong?
Mortgages
Whoever was responsible for the Bank of England morning meeting today must have run there with a smile on their face and gone through the whole release word by word.
The mortgage market strengthened a little further in September. On net, households borrowed an additional £4.8 billion secured on their homes, following borrowing of £3.0 billion in August. This pickup in borrowing follows high levels of mortgage approvals for house purchase seen over recent months. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered reaching levels slightly higher than the average of £4.0 billion in the six months to February 2020. The increase on the month reflected higher gross borrowing of £20.5 billion, although this remains below the February level of £23.4 billion.
From their perspective they will see this as a direct response to the interest-rate cuts and QE they have undertaken as net mortgage borrowing has gone from £0.2 billion in April to £4.8 billion. Something they can achieve.
The outlook,from their perspective, looks bright as well.
The number of mortgage approvals for house purchase continued increasing sharply in September, to 91,500 from 85,500 in August (Chart 1). This was the highest number of approvals since September 2007, and is 24% higher than approvals in February 2020. Approvals in September were around 10 times higher than the trough of 9,300 approvals in May.
At this point we have what in central banking terms is quite an apparent triumph as they have lit the blue touch paper for the housing market. It has not only been them as there have also been Stamp Duty reductions but we see that there is an area of the economy that monetary policy can affect.
As to what people are paying? Here are the numbers.
The ‘effective’ interest rates – the actual interest rates paid – on newly drawn, and the outstanding stock of, mortgages were little changed in September. New mortgage rates were 1.74%, an increase of 2 basis points on the month, while the interest rate on the stock of mortgage loans fell 1 basis point to 2.13% in September.
Money Supply
Curiously the Money and Credit release does not tell us the money supply numbers these days although we do get this.
Overall, private sector companies and households increased their holdings of money in September. Sterling money (known as M4ex) increased by £10.8 billion in September; a significant rise from August which saw withdrawals of £1.0 billion (Chart 5). This is a continuation of the trend of strong deposit flows seen between March and July, albeit at a much weaker pace in comparison to the £40.5 billion monthly average seen during that period.
In essence this is part of the higher savings we have observed where people have furlough payments to keep incomes going but opportunities to spend them have been cut.
I have looked them up and annual M4 (broad money) growth was 11.6% in September. So we are seeing a push of the order of 12% which is more than in the Euro area.
Consumer Credit
Here the going has got a lot tougher and the monetary push seems to be fading already.
Household’s consumer credit weakened in September with net repayments of £0.6 billion, following some additional net borrowing in July (£1.1 billion) and August (£0.3 billion).
Actually the numbers have established something of an even declining trend since July. This means that the detail looks really rather grim.
Although the repayment in September was small in comparison to the £3.9 billion monthly average seen between March and June, this contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows pushed the annual growth rate down further in September to -4.6%, a new series low since it began in 1994.
In fact it is essentially repayment of credit card debt.
The net repayment of consumer credit was driven by a net repayment on credit cards of £0.6 billion
So it has an annual growth rate of -11.3% now. That is probably due to the price of it which is something of a binary situation.For those unaware there have been quite a few 0% offers in the UK for some time now but this is also true for others.
The cost of credit card borrowing was also broadly unchanged at 17.92% in September.
Although blaming the interest-rate for credit card borrowing does have the problem that overdraft interest-rates have been on quite a tear.
The effective rates – the actual interest rate paid – on interest-charging overdrafts continued to rise in September, by 3.52 percentage points to 22.52%. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.
Perhaps those that can have switched to the much cheaper personal loans.
Rates on new personal loans to individuals were little changed in September, at 4.78%, compared to an interest rate of around 7% in early 2020.
As you can see Bank of England policy has been effective in reducing the price of those.
Comment
The present situation gives us an insight into the limits of monetary policy and as to whether we are “maxxed out”. We see that the Bank of England interest-rate cuts, QE bond purchases (another £4.4 billion this week) and credit easing can influence the housing market and personal loans. However we have also noted the way that more risky borrowers are now wondering where all the interest-rate cuts went? For example a 2 year fixed rate with a 5% deposit was 2.74% in July as the Bank of England pushed rates lower but was 3.95% in September, or a fair bit higher than before the easing ( it was typically around 3%).
So we see that monetary policy is colliding with these times even before we get out into the real economy and a reason for this can be see on this morning’s release from Lloyds Bank. Some £62.7 billion of mortgages went into payment holidays of which £9.1 billion have been further extended and £2.2 billion have missed payments. No doubt the banks fear more of this and this is why they are tightening credit for riskier borrowers which operates in the opposite direction to Bank of England policy.
So the easing gets muted and we are left mostly with the easing of credit for the government as the instrument of policy right now.
Notayesmanseconomics's Blog 
Shaun,
So we seeing the same K recovery as the US if you have a job then costs contained possibly improving but no job then minimal support and higher costs.
Although it is a K “recovery”, it is very difficult to see how it can be described as a recovery at all. The richest will continue to get richer, whilst the rest of us get poorer. This sounds like communism to me.
More like feudalism.
Yep, its the 21st century version of the corn laws, difference being back then the plebs weren’t so utterly stupid as the masses of today in that they didn’t cheer it on.
What a country we live in where unaffordable housing is the main economic policy of the 3 main parties, and any speaking up against it is ridiculed as being a commie who hates capitalism.
To be fair to us plebs, in the 1840s there was no universal “education” system to indoctrinate us….sorry, to teach us to cheer, & no msm to reinforce that “teaching.”
I always thought it strange that credit card balances are considered as ‘borrowing’. They aren’t really, they are mainly a reflection of spending. So, the reduction in card balances really reflects a reduction in spending, which could feed into low borrowings (or not, depending on the income situation).
Ditto the fact that defaults are considered as ‘debt repayment’. It is in a way and behind every BIG LIE is a kernel of truth, but it hides the true narrative of what is really going on. So, after the GFC, the US consumer seemed to pay down a lot more debt that consumers here in the UK….mainly because of the housing market related write offs undertaken by banks.
US Mortgages are different in many ways from UK ones. It is true we are going more fixed rate here but one of the major differences is the lack of a negative equity trap in the US.
After the Great Depression things were changed to encourage people to buy houses again. One upshot of that is the ability to “post the keys” back to the lender and walk away with no further obligation.
If you find your property is worth less than you paid for it but you can still afford the payments then you may still decide to walk away if the amount you have paid so far is less then the drop in value of the house. You can basically treat your mortgage payments as the rent you would have spent anyway and cease paying any more interest and principal. The bank now owns the house but importantly you as the lender are now no longer required to make any payments.
Why spend 300k on a house that is now worth 200K? You are clearly going to lose 100K out of this so if you have only spent 30K so far then drop out. It would be cheaper to get a house again later at 200K rather than continue paying off the original mortgage.
Bootsy
Recently came across jingle mail on the Wolf St blog referring to posting property keys back to lenders – that seems to sum things up by leaving problems with them.
Hotamail
Well is borrowing but also a reflection on spending however and you are correct in lower credit suggest lower spending.
This is why Shaun said on his twitter site the BOE wont like a reduction in credit card debt as its a sign of lower consumption which affects the economy.
Unfortunately the GOV are wound up with furlough rather than trying to create other jobs in the economy.
The GOV cannot keep printing or borrowing money some companies will have to go to the wall and look at what else they do to find jobs for people.
This is a really worrying situation which the GOV aren’t fully recognising at the moment imo.
As Shaun points out, a lot of this demand is coming from consumers that are getting free money in the form of furlough payments(I have mentioned on here before about the large scale fraud involved and tens of thousands of pounds payments being claimed by builders and other so called tradesmen) and the lack of opportunities to spend it, since foreign holidays and eating out/the pub are now virtually impossible.
Another aspect of our bubble economy I haven’t mentioned before is the cost of pedigree dogs, predominantly what would previously I suppose have been called fighting dog breeds, the price of puppies of these breeds have been blown up to stratospheric levels by the sheer amount of money in the system, thanks largely to the housing improvement boom(I think most of those buying are involved as builders or buying and doing up properties to sell), some breeds are now fetching up to £5,000. They are seen as major status symbols for them amoungst their peers.
For those of a less aggressive nature, even pedigree kittens are going for over £500!
Yet another sign there is too much money in the system if ever there was one needed.
Yes being honest on a BBL application was in hindsight rather silly.
But not as silly as giving tax breaks to buytolet landlords, foreign money launderers and 2nd home owners, when only a few months earlier there was talk of balancing up the economy to win an election.
Truly is beyond belief that given the chance to blame the CV19 hoax and allow property to become affordable thus enabling people to have more money to pour into the actual economy, this wretched bunch of totalitarian, crony capitalists decided to try and inflate the housing market.
I dread to think what props the boy chancellor will come up with in the next budget, but they will be huge and they will be said to benefit the young whilst pricing most out even further.
Looks more and more like they’re following the disaster capitalism playbook.
Kevin
You are correct the furlough is allowing people to spend and its really quite a risky strategy which cannot go on forever.
The “free money” that you call it is giving a false sense of security to the people who are benefiting it.
I think the GOV had to do something with the damage the coronavirus has done but there is a limit with what they have been doing. Paying money to people who aren’t working is not the answer!
With our streets and cities and gardens and council subject to so many cuts since the last financial crisis some of those furlough workers could be employed doing something else.
I do not agree to the “free money” for months and months everyone else will have to pick up the bill in the end.
Hello Shaun,
When you delay things you should be planning to deal with them effectivly later.
Can’t see any planning from HMG , may be they have but they look as if they are making it up as they go along …..
So HMG will now borrow at the cheaper rates to get the economy going ?
You’ll need jobs for that , they are rather kyboshed there !
Forbin
As I have mentioned in previous posts, the GOV don’t seem to have a plan furlough over a long period is not the answer.
As for borrowing I suspect the GOV want borrowing costs as low as possible and we are back to talking negative rates again.
As for Lloyds seeing a massive increase in mortgage approvals dear oh dear the house of cards could very well collapse and that would be terrible for the banks.
I am surprised at the average interest rates which shaun mentioned in the blog and not surprised at an increase in mortgage approvals.
Its clearly cheaper buying anything lower than £200,000 or even higher than renting property.
I just sense a worrying situation developing here Forbin and suspect you do to.
The coronavirus seriously damaging economies throughout the developed world and I haven’t seen any evidence thus far that out GOV nether leaders abroad coming up with a proper solution.
Just borrowing more and more money is not the answer its a short term adrenalin boost and with adrenalin you feel better for a time but come down to earth later on.
hello peter,
yes I have concerns. Basically I see governments getting panicky , people getting more belligerant . To cap it all the “solution” is more lockups that crush the economy when they told us all that all we need to do is flatten the curve so the health services can cope. Now it seems to be eradication – not possible , not now.
we have a litmus test , in fact we have two when you think about it.
Sweden – no lockups – rumbling cases but apparently able to cope.
Australia – strict lockups but seemly unable to eradicate ALL cases – because they forgotten what they are dealing with.
As far as the UK goes , they will have to borrow to invest at some point. Considering HMG past performance I’m not too hopeful. BIRP will help them do trhat but its a two edged sword.
time for some single malt I think , and some popcorn 😉
Forbin
IMF downgrades UK today
https://news.sky.com/story/imf-delivers-surprise-uk-growth-downgrade-blaming-second-wave-headwinds-12117839
This isn’t surprising we are now in a second wave of coronavirus infections and no end in sight for a cure.
The damage to the economy will increase, West Yorkshire the latest to go into tier 3 on Monday, more places will follow.
I have mixed feelings to be honest on the Sweden model the danger here is the hospitals will become overwhelmed if we follow Sweden and I can see the UK new Hartley Hospitals being used now.
If the GOV could find a way of protecting the most vulnerable it may be an idea but I think it would be hard to achieve.
I happen to think the coronavirus far more infectious than the flu there lies the problem.
Number of tests for seasonal flu = zero, so positive results = zero.
Number of tests for Covid-19 increasing by the day, so number of (supposedly) positive results is also increasing by the day.
If you have more people IQ tests, you would find more idiots.
Another sign of central bankers attempts to reflate the economy or should I say of “hidden” inflation – invisible to only central bankers of course – is checking your orders page on Amazon.You can look what you paid for items over previous months or years and see how much they have gone up by over time. It is certainly no surprise to me to see many items over the last 12-24mths months gone up 10-20% some more some less, but inflation is certainly starting move up very quickly.
Hi Kevin
That is an interesting idea. But if you send it to the Office for National Statistics I am sure they can find a way to tell you there is no inflation! I have noted a few things rising in price as well and will await the next few inflation releases to see if they pick anything up.
I raised the issue of what was now being spent on face coverings and the like.
“Expenditure on products such as face coverings and hand sanitisers has inarguably increased over the last 7 months. However, based on the scanner data we have been receiving we believe that, as a proportion of total expenditure, it remains below the levels that price movements would have any discernible impact on our figures – essentially these products would receive a 0% weight in an index. Though we will continue to monitor this.”
To my mins they should now be in any cost of living index.
Greetings from second incarceration in south west France. Today was spent stocking up the wine cellar and vitals. Micron has been ‘done’ by the Imperial modellers like everyone else.
Mrs W is thinking in terms of anarchy and bombs, I on the other hand, are more sanguine, just plotting to take out certain individuals on humanitarian grounds of course.
You try to think positive thoughts, but sometimes its very difficult.
Hi Jim, if you have some time. this podcast is very enlightening.
https://podcasts.apple.com/gb/podcast/the-delingpod-the-james-delingpole-podcast/id1449753062?i=1000495618783
I am afraid no positives afterwards though