Can the Bank of England finally catch up with what is happening in the UK economy?

As the day started and we reached a minute past midnight there was some very welcome news for the Bank of England.

INFLATION BROUGHT TO A HEEL

The headline from the British Retail Consortium will no doubt have been emphasised by the research student presenting the morning meeting. A “well played Governor” never does career prospects any harm and could be followed up with this.

Shop Price annual inflation eased to 0.8% in April, down from 1.3% in March. This is below the 3-month average rate of 1.4%. Shop price annual growth is its lowest since December 2021.

Non-Food entered deflation at -0.6% in April, down from 0.2% in the preceding month. This is below the 3-month average rate of 0.2%. Inflation is its lowest since October 2021.

As you can see we have a sector which is in disinflation ( unless sales are falling as well it is not deflation), plus the overall number is below 1%. So this is another hint that UK inflation is on its way to the target of 2% and maybe below. If there is a fly in this particular ointment it is the way that we still have food inflation.

Food inflation decelerated to 3.4% in April, down from 3.7% in March. This is below the 3-month average rate of 3.9% and is the 12^th consecutive deceleration in the food category. Inflation is its lowest since March 2022.

As you can see it is falling but when one allows for the falls at the commodity level in the UN Food Price Index it is disappointing that these have not arrived in the shops. On a personal level I have posted before paying more for potatoes and can now add carrots to the list. Let me also add a change in shop behaviour as Marks and Spencer can sometimes be cheaper than the discounters (Lidl in my area) for some vegetables.

Also one recent worry seems to be correcting.

Cocoa prices down another >10% today, following an historic >15% plunge on Monday. With @BobOnMarkets

permission, let’s declare the chocolate market has entered “meltdown” territory. ( @JavierBlas )

Reverse Indicator Alert

I am not surprised about the above because the thoughts of Chief Economist Huw Pill headed in the opposite direction last week.

against the background of a welcome decline in headline inflation, the outlook for UK monetary policy in the coming quarters has not changed substantially since the beginning
of March.

It appears that Huw who missed the actual inflation surge using all his expertise and experience to label it Transitory now sees it everywhere.

But the MPC’s framework for assessing the inflation outlook rightly remains more focused on the persistent component of consumer price inflation, as assessed through
developments in the three key indicators of inflation persistence identified by the Committee: services price inflation, pay growth, and the tightness of the UK labour market.

This leaves Huw in a rather delicate position. Having assured us that an interest-rate of 0.1% would be fine for 4% inflation. Huw now needs to explain why he thinks an interest-rate of 5.25% is required to deal with inflation set to be half that. Were the matter not so serious this would be the comedy section.

Putting it another way having ignored the actual causes of inflation Huw now wants to act on the consequences and on that road interest-rates would stay high for a while as it does not work like that.

Mortgages

There is another area which is awkward for Chief Economist Pill. But our research student will be happy to tell Governor Bailey this.

Net approvals (that is, approvals net of cancellations) for house purchases, which is an indicator of future borrowing, continued their upward trend, increasing from 60,500 in February to 61,300 in March – the highest number of net approvals since September 2022 (65,400).

So the outlook for this area is improving and net lending is positive.

Individuals borrowed, on net, £0.3 billion of mortgage debt in March, compared to £1.6 billion in February. The annual growth rate for net mortgage lending remained slightly negative at -0.1% in March.

Whilst the annual rate is still negative things look to be turning which the Governor will beam at. But there is a catch and it comes here.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages decreased by 17 basis points, to 4.73% in March.

Because the Bank of England looks at when people pay this they put in a 3 month lag for the gap between agreement and the actual start. So these numbers represent the fall in bond yields as we entered 2024. Whereas anyone following the updates on here will not be surprised that we are not singing along with Luther Vandross.

I know better now
And I’ve had a change of heart

Or as Sky News put it yesterday.

We’ve reported on a string of rate bumps from the high street over the last 10 days, and this morning NatWest, Santander and Nationwide moved.

In its second hikes announcement in less than a week, NatWest laid out increases across its full range of residential and buy-to-let fixed deals of up to 0.22%.

Santander, meanwhile, announced increases for both fixed and tracker deals across their residential and buy-to-let products – up to 0.25%.

The same hikes are being imposed for a range of Nationwide deals.

All of these will kick in tomorrow.

As you can see the environment is not now the one which turned the mortgage market. My leading indicator, the UK five-year bond yield, is 4.25% as opposed to around 3.5% as the year began. Thus UK monetary policy is tightening with inflation falling and Huw as ever looking the wrong way.

Consumer Credit

This category looks so much more friendly than its previous moniker unsecured credit suggested. As you can see it has shrugged off the interest-rate rises.

Net consumer credit borrowing increased to £1.6 billion in March, from £1.4 billion in February……..The annual growth rate for all consumer credit remained unchanged when compared to February, at 8.8%. The annual growth rates for credit cards and for other forms of consumer credit were both little changed at 12.0% and 7.4%, respectively.

In fact credit card growth seems to be on rather a tear. I fear that this represents people borrowing wherever they can in response to the cost of living crisis that we have been experiencing. I suppose even the rates below are much cheaper than payday lenders and the like.

In March, the effective interest rate on interest-charging overdrafts and interest-bearing credit cards decreased by 58, and 29 basis points, to 22.21% and 21.26%, respectively.

Money Supply

The hints of a turn in this area have continued.

The net flow of sterling money (known as M4ex) continued to increase in March. M4ex rose by £12.1 billion, compared to an increase of £8.9 billion in February.

Putting this another way the last 4 months up to March have seen cumulative increases of 1.4%. The impact of this is that the annual rate of growth is now 0.3%.

Comment

The situation facing the Bank of England is one of nuance. Sadly that seems too subtle for our hapless Chief Economist at the Bank of England. Inflation looks set to fall back to its target and more of the sort of action reported by the BRC this morning could under shoot it for a while. Looking ahead it is welcome that broad money growth is looking more positive but it is still quite a way short of the numbers consistent with a combination of low inflation and some decent economic growth.

As some of you have pointed out there are issues over the impact of higher interest-rates. That has been reinforced by the way that the money supplies of the Euro area and the UK have rallied in spite of it.But as inflation declines the confidence of the Bank of England is so low that it still feels the need to act against a surge which was in 2022. This means that having faced the surge with the lowest interest-rate ever they now impose 5.25% meaning rather than improving the situation they have been a malevolent and indeed incompetent organisation.

The one caveat is the external factor which as we have seen via the falls in the Japanese Yen is an issue. Thus if I was at the Bank of England I would let the ECB act first this time around.