Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.
UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.
Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).
London’s average house prices hit a record high of £496,000 in September 2020.
These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.
As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.
“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”
You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?
Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).
Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.
If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.
Pump It Up!
This is the change seen in October.
Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.
The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.
There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.
Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.
As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.
This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.
Mortgages
Let me now switch to the part that will be emphasised at the Bank of England morning meeting.
The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.
Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.
The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.
However the road to the fast track promotion scheme will mean relegating this part to the small print.
The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,
Perhaps our junior could emphasise this part.
but remain below the rate at the start of the year (1.85% in January).
Consumer Credit
This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.
Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.
A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.
Small Business Lending
For once these numbers look good.
Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .
Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.
Comment
The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.
Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.
Also there is this.
Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.
So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.
The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.
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What we are seeing here is the bond market finally beginning to adjust to the likelihood of higher inflation in the future due to out of control QE and monetisation of government debt, will the bond market win over the money printers?
Up until now(the last forty years), anyone betting against the central banks has been taken to the proverbial woodshed for a good hiding, and the Fed has already stated it will control the yield curve by strategic buying(keeping long bond yields down).
How far they take it is anybody’s’ guess as the more they do it the further downward pressure is put on the dollar, but like the sinking of the unsinkable Titanic(no one thinks the dollar or sterling will fail either- lockdown until March and a hard BREXIT should do the trick), which took two and a half hours to sink after hitting the iceberg, but mere minutes once the bow went below the surface, once a currency starts to collapse the end is very quick, quite how the Fed will prevent that whilst at the same time exponentially increasing the supply of dollars is something we will observe with first mild amusement and then sheer terror over the coming years.
I too suspect something egregious. I think it was Hemmingway asked how he went bankrupt. “Two ways,” he answers. “Gradually, then suddenly”.
We have been watching the gradual… however the dollar falling is indications of a pace not seen before. In every other “global recession” there is a squeal for dollars with swap lines extended, even to the UK and BoE in 2007.
This time Sterling is appreciating, and this is with the worst pandemic and economic outcome globally. How can Sterling appreciate in these circumstances. Surely I am not the only one to see this contradiction?
It seems that the dollars we give to China for Xmas presents are going to disappoint them, and perhaps in a massive under-appreciation as the weeks go by. This is the trade equivalent of a disaster and it can’t continue because it hollows the West out completely.
Gold for instance, like many other commodities are all getting underpriced with the dollar. Maybe this is a compensation for China in the short term. We are starting a wild ride. I see Biden & Yellen, adding to this play with their great reset agenda…
Who am I to say?
Wait and see what Boris does with the trade agreement, I fully expect him to crash us out without a deal, isn’t it ironic that when we had strong cards, Treason May agreed to everything and asked for nothing in the process, delaying a deal until it could be stopped by parliament, when that didn’t work and we now have virtually no strong cards to play(Biden victory ensures no trade deal with the US) Boris is now being seen as the awkward one who doesn’t appear to want to settle and has also just got rid of Cummings who was Mr Brexit! Doesn’t bode well for us getting a deal IMHO, so sterling’s rally will be very short lived, a couple of weeks time and it will be heading south again when the markets realise we are crashing out without a deal and then follow that with another nonsensical lockdown until March to give the last rites to the economy and it should be pretty much all over bar the shouting.
A hard Brexit is the best possible outcome for UK consumers.
Just a coupler of quickies.
With people working from home some are paying off credit cards with savings on transport costs, which is mentioned in the Guardian this morning:
10:31
“Biggest fall in UK consumer credit since 1994 amid pandemic
New figures from the Bank of England show that households have cut back on consumer credit at the fastest pace since at least 1994.
The Bank reports that net consumer lending fell by £590m in October, taking the annual rate to a survey-record low of -5.6%.
October’s fall was mainly due to people paying off their credit cards rather than taking on more debt.
The Covid-19 pandemic, and the new restrictions imposed this autumn, have meant people simply haven’t been spending as they would normally.
Plus, households worried about the future (perhaps furloughed) will be putting off big purchases, while office workers forced to stay at home are saving on commuting costs and able to pay off outstanding credit bills.
It’s quite a turnaround – given Britain’s long-running appetite for consumer credit which has helped support high street retailers such as Arcadia.”
In relation to interest rates on the increase, mortgage rates are indeed relatively low but overdrafts now shot through the roof and it isn’t surprising Joe Public now wanting to pay off their credit cards off as bank charges excluding mortgages rising rapidly.
This is all bad news for retail sales, both Debenhams and and ARCADIA are heading for trouble the latter on the verge of administration and both companies employ thousands of employees who are likely to join the dole que after Christmas if not before.
Guaedian telling you this today?
I told you months ago.
Remember EU’s “Farm to fork” & its (price) encouragement for “plant-based diets” that was pooh-poohed as part of a conspiracy theory by the dupes on here?
https://www.bbc.co.uk/news/uk-politics-55102891
Well, if the EU & the UK & the UN & the WEF are all “leading” us that way, isn’t it indeed a global conspiracy?
It is not a conspiracy! The BBC made some disinformed article showing a great lack of clarity. They determined that it can’t be a conspiracy because the WEF plan exists and is true.
https://www.bbc.co.uk/news/55017002
Some of the most bizarre text I’ve ever seen written, you might call it truth decay.
Weird logic!
I would not take it as good news that SMEs are borrowing more, in present circumstances.
How many are businesses which, without access to this money, would go bust?
SMEs are most at risk from the present martial law, so I would see their borrowing as, “Nothing to lose,” rather than portents of recovery.
Hi therrawbuzzin
I agree with you. Although there is a nuance that viable companies might be kept going depending on how much debt is built up. But that is not the way the Bank of England will present things in the future as it looks as though the various lending schemes have had some success.?
Great blog as usual, Shaun.
On the issue of house prices in the inflation measures, a reading of the HMT-UKSA document “A Response to the Consultation on the Reform to Retail Prices Index (RPI) Methodology” was discouraging after the elation of hearing that any neutering of the RPI would be postponed for at least a decade. On p.35, one finds: “Where there is no equivalent, this is primarily due to the absence of the section in question; for example, Mortgage Interest Payments, which are not included in CPIH (owner occupiers’ housing costs are instead captured through the use of an equivalent rent). However, by the time that reform to RPI is implemented, the Houseshold [sic] Costs Indices will be badged as National Statistic measures, and these will provide an appropriate replacement for the omitted sections.” First, the RPIX, which HMT still wants to get rid of, albeit with a lag, was chosen as the target inflation indicator of the Bank of England specifically because it was insensitive to mortgage rate changes. This passage indicates that the authorites are well aware that, conceptually speaking, mortgage rate changes are not excluded from the CPIH, they are just subsumed in equivalent rent. Second, and more important, while the plan to get rid of an RPI series that includes house prices is kicked down the road for a decade, it really seems questionable that the authorities intend to replace it with something like John Astin and Jill Leyland’s vision of a Household Inflation Index. The authorities don’t take the Household Costs Indices seriously enough even to spell its name properly, and it doesn’t include equity payments on a home. The HCIC measure which the National Statistician said would include “capital mortgage repayments” (a somewhat restrictive version of equity payments, surely!) isn’t mentioned at all.
Hi Andrew and thank you
It is my opinion that they have no intention of completing the HCI programme properly. I could have predicted that the “trouble” areas would be the capital payments and the inclusion of student loans. I still remember the meeting at the Royal Statistical Society where the UK ONS declared it planned to produce the HCIs only annually. If you can describe a meeting at the RSS as rowdy that one was because it was so transparent what was intended.
I fear another RPIJ type situation where something is promoted for a while but then dropped suddenly.
Still there is another 9 years to press for the retention of and reform to the RPI….
So for 23 years since NuLabour gave the BoE independence, they’ve used RPI which wholly ignores house price inflation …. when they pumped up the property market to utterly insane levels.
Then when prices are at these insane levels and unemployment is about to go through the roof, they want to bring house price “inflation” into the equation, when it truly must be time for a crash … thus bringing down inflation levels.
These people should be put up against the wall.
And shot.
Interesting comments on negative interest rates from BOE Silvana Tenreyro which will cause some controversy on here:
https://www.reuters.com/article/britain-boe-tenreyro-rates-idUSS8N2HE024
LONDON, Nov 30 (Reuters) – Bank of England policymaker Silvana Tenreyro said a cut in the central bank’s interest rate to below zero could help Britain’s economy via a weaker exchange rate and higher asset prices, as well as increased bank lending.
“The evidence we have from Europe and other European countries (that have cut rates below zero) is that the lending channel of the transmission of monetary policy has worked,” Tenreyro told the Resolution Foundation think tank.
“And apart from the bank lending channel I would expect the other channels to also work well – the exchange rate channel, and the wealth or asset price channel.”
Thanks for the link… Mindless pursuit down the blindest of alleys. We must be near the end now. I’ve read elsewhere that were rates to rise to 1%, post pandemic, Govt spending so high and debt piles even greater that the national repayment coupon would collapse it all.. I guess that is where -ve came from… lets escape the jaws of he debt monster..
Looks like negative rates are coming sooner or later but the BOE have managed to resist thus far.
Arcadia now in administration and as job losses mount it will place more pressure on BOE to cut interest rates to zero or go negative now
https://www.bbc.co.uk/news/business-55139369
Some Arcadia brands also trade in Debenhams and they are also looking for a buyer and few investors have an appetite for bricks and mortar stores.
Shaun,
Are we going the US route of extend & pretend where non payment not treated as default but ignored requiring forbearance?
Stamp duty & mortgage payment holidays kick the can but are the precious increasing rates in preparation for worse to come in 2021?
Hi Chris
I think that pretty much everyone is on that road to nowhere. It is all part of the To Infinity! And Beyond! Theme. For example what else can the ECB do with places like Italy.
As to The Precious it looks as though they are battening down the hatches for 2021.
“Bank of England policymaker Silvana Tenreyro said a cut in the central bank’s interest rate to below zero could help Britain’s economy via a weaker exchange rate and higher asset prices, as well as increased bank lending.”
Yes a cheaper exchange rate would cause an increase in prices for consumers already maxxed out on credit and borrowing together with a loss of income from covid restrictions or maybe even a loss of their job – bullish!
Exporters would find the increase in the cost of their imported raw materials would soon negate and ultimately exceed the lower price they could charge their foreign customers.
Increased bank lending? Oh! that loan I have deferred for the last ten years and just couldn’t decide to go ahead with, well that quarter point cut finally made that decision for me, I’m going all in!!! Borrowing the max, to invest in that new machine to make widgets for export to the EU -oh the government is now going to force a hard BREXIT in order to allow the next government to rejoin some time in the future so there is no export market! – or to buy those flats I can rent out to all those people working from home that will soon be un…em…pl…oyed…….oh wait.
Never mind there is the prospect of higher asset prices! Now where is that Jamie Oliver recipe for cooking bricks?
Kevin they all want higher asset prices something which hasn’t gone unnoticed by Shaun, is that to support banks lending and ultimately their balance sheets?
Hi Shaun
Off topic, I know, but the article mentioned yet again the enormous BoE purchases taking place almost daily.
I have a theory that the way that this will play out is that the government and the BoE will find a method of the bank writing off the bonds that it owns and recapitalising itself so that hey presto, the debt drops off the books of the national debt.
I cannot see quite how this will happen yet, but maybe the BoE digital currency could be used to subscribe for BoE equity so that the bank is still solvent after writing off the hundreds of billions of bonds it owns.
I just feel that, with government institutions on both sides of the equation, a trick will be played of some sort to get rid of the debt.