The Bank of England misleads on inflation as the money supply surges

This week it is the Bank of England which is in focus as there are quite a few matters on its plate. On Wednesday night it will vote on how much to increase UK interest-rates via its own Bank Rate. At the peak of the crisis around a month ago some market expectations were for increases of 2% but as time has passed they have faded quite a bit and things are more in line with the move of 0.75% by the ECB last week. Of course the US Federal Reserve may throw a spanner in the works and I presume they will have the sense to wait for its vote on Wednesday evening before voting themselves.

Also they have decided to ignore my advice and press ahead with some active bond sales or Quantitative Tightening. Although if you look at the plan you can see that they have modified in somewhat presumably due to nerves about its impact.

1. These sales will begin on Tuesday 1 November, ending on Thursday 8 December 2022.
2. These gilt sale operations will be distributed evenly across the short and medium maturity sectors only.
3. The Bank will conduct eight sale operations across each of these two maturity sectors (four in each), with a planned size of £750mn per auction. The dates for the individual auctions are specified in the table below.

So the sales start tomorrow but with a short-dated operation ( 3-7 years maturity) and next Monday will see a medium-dated operation.  The total size will be £6 billion. So the size has been reduced from the initial plans as well. The estimate of £80 billion per annum suggested £20 billion per quarter rather than the £6 billion we are getting. Also there are no longer dated Gilts being sold which reminds me of the £19.3 billion of long-dated bonds that the Bank of England bought in late September and early October.. What will happen to them?

The Bank’s approach to the unwind of the stock of gilts purchased in the course of its recent temporary and targeted financial stability operations will be confirmed separately in due course.

Oh and in case you did not believe the plans had changed here is the official denial.

As set out previously, the MPC’s decision at its September meeting to reduce the stock of purchased gilts is unaffected and unchanged.

Assuming the QT happens then rather than the implied £20 billion reduction in its bond holdings there will be £13.3 billion more. Also there will have been an “Operation Twist” style move as it sells shorter-dated bonds and previously bought longer-dated ones. So it has increased its own interest-rate exposure just as it is raising interest-rates. Genius!

Oh and I did say they are nervous.

The Bank will closely monitor the impact of this gilt sales programme on market conditions, and reserves the right to amend its schedule, including the gilts to be sold and the size of its auctions, or any other aspects of its approach at its sole discretion.

Problems with inflation

Via its Bank Underground website we have been treated to a new analysis of inflation. I had an issue with the title and the first two words so I did not get very far. Anyway they do not have much of an open door policy to comments because I made mine on Thursday lunchtime and they have not appeared. So here is the title and the first 2 words followed by my reply.

How broad-based is the increase in UK inflation?

CPI inflation

Thank you for the post which is interesting.

 

However by putting “broad based” in the title and then “inflation”  there is the implication that your analysis is of that form. However by using the flawed CPI inflation measure that implication ends with the first two words of the post.

 

For those unaware the CPI inflation measure ignores owner-occupied housing which is a large part of people’s overall spending and hence experience of inflation.  Estimate’s of the size vary but for example the US Bureau of Labor Statistics puts it at 23.8%. So an analysis ignoring this is already looking away from what is a large part of people’s experience of inflation.

 

One can take that further because if we look at the statistics we have then we see this.

 

“UK average house prices increased by 13.6% over the year to August 2022…….On a seasonally adjusted basis, average house prices in the UK increased by 1.1% between July and August 2022, ” ( Office for National Statistics or ONS)

 

Many owner-occupiers will also be affected by mortgage costs. On a basic level they have been in the media pretty much everywhere which gives us a clue. But the ONS also calculates a number for mortgage interest payments and they were up by 19.7% over the past year.

 

As you can see the inflation picture changes once these are included rather than ignored. But there is more and we do not have to leave the topic of housing.This is because the CPI measure does include rents but sadly due to the way it has a 14 month stock of rents it is in fact giving us rents from 2021 rather than 2022, I am sure that the fast rise in London rents is a topic discussed amongst Bank of England staff but the official statistics instead live in this rather different reality.

 

“Private rental prices in London increased by 2.8% in the 12 months to September 2022, up from an increase of 2.5% in August 2022……… Despite this, London’s rental price growth in September 2022 remains the lowest of all English regions.”

 

How would your analysis change if we add in these elements to more accurately reflect the inflation picture?

 

Thank you

 

Shaun Richards

Money Supply Surges

We saw a consequence of the pension fund problem at the end of September as they undertook the electronic equivalent of a dash for cash.

The flow of sterling money (known as M4ex) increased sharply to £ 74.4 billion in September, from £4.4 billion in August. This was mostly driven by flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money increasing to £67.8 billion in September from -£3.4 billion in August.

In fact they borrowed some money too as some £19.3 billion of the borrowing below was them too.

The flow of sterling net lending to private sector companies and households, or M4Lex, also rose, to £25.9 billion in September from £4.2 billion in August.

So we had money supply growth of 2.7% on the month raising the annual rate to 7%!

Mortgages

So far mortgage lending has ignored the rises in mortgage rates.

Net borrowing of mortgage debt by individuals remained at £6.1 billion in September (Chart 1). This is above the past 6-month average of £5.7 billion.

But there was a warning signal of changes to come.

Approvals for house purchases, an indicator of future borrowing, decreased significantly to 66,800 in September, from 74,400 in August, but were above the past 6-month average of 67,200.

But the interest-rate beat went on and we know that a bit of a turbo-charger was applied in October.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 29 basis points to 2.84% in September, the largest monthly increase since December 2021 when Bank Rate began rising.

Consumer Credit

This headed in the other direction in September.

Individuals borrowed an additional £0.7 billion in consumer credit in September, on net, following £1.2 billion of borrowing in August. This was the lowest level since December 2021 (£0.3 billion).

It was new credit card borrowing which faded to £100 million while this picked up.

£0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans).

I am not sure how relevant the mention of car dealership finance is. It has become more frequent but we get so little detail.

Maybe people had time to note the wide difference in interest-rates charged,

The effective rate on new personal loans to individuals decreased by 13 basis points to 6.75% in September, but remained higher than the December 2021 rate of 6.27%. Conversely, the effective rate on interest bearing credit cards increased to 18.96% in September, and sits above the December 2021 rate of 17.86%.

Comment

So we arrive with a lot of contrary influences. We have QT but it is as Star Trek would put it “not as you know it” as it is much smaller in size this time around and concentrated at the shorter maturities. I suppose it would be typical of central bank language for QT to coincide with a larger balance sheet then before! Or as Diana Ross put it.

Upside down
Boy, you turn me
Inside out
And round and round

Next up we have interest-rates where they should match the ECB and presumably the Federal Reserve with 0.75%. But we know that Governor Bailey considers 0.5% to be something of a “bazooka”. That is of course evidence free but central bankers are not strong on evidence.

The money supply numbers will be especially interesting next month to see how much of the late September surge washes out of them.

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast198?si=6112257cfccd43c9be852a748b9fd674&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing