What happens now to UK house prices?

It was only on Friday that I looked at something potentially beneficial for UK house prices which is a Bank of England interest-rate cut. That could come as soon as this week and later in the day markets adjusted to this as the Gilt market rallied and a ten-year yield of 0.86% has been replaced by one of 0.77% this morning. So maybe some cheaper mortgage rates are on their way.

London

This morning the Financial Times has moved onto one of its favourite topics and here it comes.

Agents for high-end London property have reported a bounce in multi-million-pound home sales after Boris Johnson’s election victory. Buying and selling agents said purchasers were committing to buy homes worth up to £50m after the decisive Conservative win provided political clarity. Overseas buyers also want to pre-empt a stamp duty surcharge planned by Mr Johnson’s government.

So even if we allow for some estate agent hype the new government and the prospect of some Brexit certainty does seem to have had a impact. We also got some more specific details.

Camilla Dell, founder of the buying agency Black Brick, said many of her clients had waited to exchange contracts until after the vote, including one buying a £3.8m newly built apartment in St John’s Wood. She said most of her company’s pipeline of £50m in home purchases would now proceed quickly. “They all want to get on and exchange, and not just because of potential stamp duty changes. A more confident market will make sellers more bullish on price,” she said.

Actually when we look at the next quote £50 million can go quite quickly.

Trevor Abrahmsohn, managing director of Glentree International — which specialises in super-prime north London homes — said an Asian buyer had committed on Friday to buying a £28m home and another purchaser to spending £5m on a property. “This is a shot of adrenalin in a market that was comatose,” he said.

So far you may note that these are commitments relying on estate agent’s word rather than actual purchases. To be fair it is so soon after the election that actual purchases are unlikely. But there does seem to be something going on as the often reliable Henry Pryor has tweeted this.

I’ve got a dozen clients looking for new homes with £25m between them bit.ly/35scLtK plus a group of others with a pot of £50m for post-Election, pre-Brexit, pre-Budget opportunities.

If we ask the Carly Simon question which is Why? We see that there are some factors at play. The settled election result is one although I note that Henry Pryor seems dubious about this concept.

 I even heard of deals going through with a ‘Corbyn clause’ where the contracts could be rescinded if Labour got in . .

Also there is this.

In November the Conservatives pledged to charge overseas buyers an additional 3 per cent of the purchase price in stamp duty when they buy homes in England. This would add to an existing 3 per cent surcharge for buyers of second and additional homes.

The Asian buyer above should he/she exist would have to pay an extra £840,000 which feels eye-watering.

Context

Whilst there is no doubt some hype in the above there is probably something going on. However there is a catch as it faces quite a lot of extra supply in central London. For example I went for a run yesterday and passed through the Battersea Power Station site where there is a large advert for Battersea Roof Garden with 600 flats being built. The roof garden is a nice touch but the description of “much needed green space” raises a smile once you know it is about 100 years from Battersea Park.

Added to this is the rest of the Nine Elms development and the Qatari development on Chelsea Bridge Road. Of course there is bias here as the main developments are in my area but the scale of them is significant and will require what are at those prices a significant number of purchasers as time passes.

Builders Share Prices

It would seem that investors on Friday were mulling a new version of Help To Buy.

In early trading, Taylor Wimpey shares rose 15% to 200p, while Barratt Developments and Berkeley Homes both registered rises of 13%, taking their share prices to 755p and 5,084p respectively.

Persimmon and Bellway were up 11%, to 2,784p and 3,086p, while Bovis and Redrow saw their stocks rise by 9% to 1,363p and 746p respectively. ( Building Magazine)

So there may be some support from that looking ahead. Whilst many developments in central London are too expensive to qualify some studio flats are priced within its range.

Rightmove

They have also joined the fray today.

LONDON (Reuters) – Asking prices for British houses fell this month by the smallest amount for any December since 2006, a survey showed on Monday, pointing to some upside for a housing market subdued by Brexit and election uncertainty.

Rightmove said asking prices, which are not seasonally adjusted, fell by 0.9% on a monthly basis after a bigger-than-normal 1.3% drop in November.

Indeed they go further with this.

Rightmove forecasts a 2% rise in asking prices in 2020.

That is a fascinating conclusion for an organisation which thinks this!

“With much of the political uncertainty removed, we expect that the number of properties for sale will recover as more new sellers come to market, making up some of this year’s lost ground,” Rightmove director Miles Shipside said.

So more sellers will lead to higher prices. Really?

Comment

The media seem to be starting something of a campaign on this front as even the i newspaper was on the case on Friday.

Property experts now expect those who have been holding off to go back to doing deals potentially driving house prices up.

“Expect a sharp uplift in transaction levels starting early in 2020, as buyers and sellers who have played it safe put their plans into motion,“ said Andrew Montlake, managing director of mortgage broker Coreco, adding that a ”huge amount“ of pent-up demand out there looks set to be unleashed on the market next year.

They should introduce Mr.Montlake to Rightmove as his “huge amount” of buyers could meet all their sellers.

However some factors have been in play all along. For example if you trusted the polls and bought UK property when the UK Pound £ was at US $1.19 and various FT journalists were saying on social media it was going lower you now have a solid return ( US $1.33. It will vary between foreign buyers as to how strong the exchange rate influence is but for some it will be major. Asian buyers may note that against the Japanese Yen there has been a rally from 127 to 146 already.

Thus my conclusion is that any rally in UK house prices will require more government and Bank of England intervention/ Otherwise we are on a road to nowhere with possible falls. I welcome that as with real wages rising finally affordability is heading in the right direction.

Podcast

Good to see UK wages rising faster than house prices

After yesterday’s employment and wages data we advance on the latest UK inflation and house price data today. If that seems the wrong way around then yes it did used to be the other way around. But it was decided that getting the wages numbers at 9:30 on a Wednesday did not give our parliamentarians time to use them at Prime Ministers Questions later in the day.

Moving on from that let me set the scene by pointing out that with a few exceptions inflation seems to be in retreat. When we consider the world of low and negative interest-rates in which we live then this is another fail for economics 101. Inflation should have been higher as we observe another gap between theory and reality. Mostly the issue comes from putting the world consumer in front of inflation as those are the numbers used whereas the monetary easing went into asset prices. I noted someone pointing out that Germany had very little house price inflation before 2010 yesterday and had a wry smile. But with the US S&P 500 index above 3000 it is also true that money went into equity prices although of course some of that is genuine growth. Also bond markets have been pumped up to extraordinary levels making final salary pensions and annuities eye-wateringly expensive.

So as we note that it is a narrow measure of inflation we are pointed towards we also note that it looks like it has been trending lower.

The US looks to be below target, the Euro area has got further away from it in spite of all the actions and the line for Japan shows complete failure in the main Abenomics objective. Oh and they should have put the Europe line in the middle as they mean 0.9% not -0.9%.

The UK Pound £

There is some currency driven inflation in play for the UK however as we are in the midst of a weak run. The recent decline started on the 3rd of May when the effective or trade-weighted index was at 79.8 as opposed to the latest 75.6. The main player here is the US Dollar due to the vast majority of commodities being price in it. The fall here over the same time period is from US $1.317 to US $1.24 as I type this. So slightly worse.

If we switch to the oil price we see that things have changed since last month. Here are our official statisticians from back then.

Brent futures were down to $61.33 a barrel and U.S. West Texas Intermediate (WTI) crude futures were down to
$51.93.

Since then the decreases they were looking at have been increases with Brent Crude at US $64.60 and even more so with WTI at US $57.70. That will not feed into the  consumer inflation numbers today but will do so over time. So whilst there is not much inflation in the offing the UK is likely to see more mostly via a weak currency.

Today’s data

This was something to put a smile on the face of Bank of England Governor Mark Carney as he whiles away the time waiting for a phone call from the IMF.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in June 2019, unchanged from May 2019.

So dead on target although the superficial theme of a type of summer lull ignores a fair bit of action under the surface.

The largest downward contributions to change in the 12-month rate between May and June 2019 came from motor fuels, accommodation services and electricity, gas and other fuels, with prices in each category falling between May and June 2019 compared with price rises between the same two months a year ago………The largest offsetting upward contributions to change came from clothing and food.

Just for clarity utility prices were unchanged as opposed to last year when gas and electricity prices were raised. The clothing picture is also more complex than presented as prices there still hint at trouble on the high street.

Clothing and footwear was the only broad group producing a downward contribution in June 2019, reflecting a fall in prices of 0.4% on the year.

Prices fell by less than earlier in the year.

Prospects

The immediate prospects are downwards.

The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to June 2019, down from 1.9% in May 2019.

So goods inflation should trend lower and that may hold sway for a bit.

The growth rate of prices for materials and fuels used in the manufacturing process fell 0.3% on the year to June 2019, down from 1.4% in May 2019…….The annual rate of input inflation was negative for the first time since June 2016, driven by a large downward contribution from crude oil.

Thus we see the broad sweep of lower inflation that we looked at earlier via lower inflation expectations. The cautionary note is that due to the lower UK Pound we will see more inflation than elsewhere and in this instance also a higher oil price will affect us. We have a rough rule of thumb for how this is playing out if we look at the Euro area.

The euro area annual inflation rate was 1.3% in June 2019, up from 1.2% in May.

So 0.7% it is then…..

House Prices

Here is something that on national emoji day should be represented with a thumbs up and a smile.

Average house prices in the UK increased by 1.2% in the year to May 2019, down from 1.5% in April 2019 . Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 4.4% over the year to May 2019, down from a fall of 1.7% in April 2019 and the lowest annual rate in London since August 2009 when it was negative 7.0%.

We see that real wages are increasing by around 2% per annum compared to house prices which is very different to the general picture in the credit crunch era as Rupert Seggins reminds us.

The longer term picture. Average London house prices up 53% on January 2008 vs a UK average of 24%.

Also the house price falls in London which seem to be creating quite a scare on social media amongst the journalist fraternity are welcome. Prices in London are too high for the vast majority.

There is an irony in that for once, by fluke the woeful use of imputed rents does not affect the situation too much.

The OOH component annual rate is 1.2%, unchanged from last month.

Although we have another conceptual problem with it. That is the issue of rents usually rising with wages as the rise in both nominal and real wages are not impacting. This may be because the rent numbers are heavily lagged, I suspect that any impact takes around nine months and the full impact 18 but that is my opinion as we are not told.

Comment

We have had a couple of days of good data from the UK economy giving us a summer tinge. A fall in inflation would have been better but actually RPI fans did get one.

The all items RPI annual rate is 2.9%, down from 3.0% last month.

The gap between it and the other measures may trim a little over the next few months as the house price measure it uses ( depreciation) is lagged too. One clear improvement that could be made to it would be to put house prices in directly and I would look to increase the weight of it in the basket. Why? Well if we take the broad sweep using rent has owner occupied housing with a weight of around 17% in the basket whereas house prices in the two versions of it are weighted at 7-8%. So your average brick or window has twice the impact using rents which have lower inflation than house prices which generally have higher inflation.

 

 

 

What has been the UK financial market response to the current crises?

At the moment it is clear that the UK is not only going to the polls today it is in the middle of a political crisis. Yet financial markets and the economy are not behaving as they did in the past and mostly this is a positive, although care is needed as we still in the wake of the credit crunch effect. You might think that the Bank of England would be on the case but these days it seems keen to deflect away from monetary policy.

We’ve published a report for people working in the general insurance sector. It’s on how to assess the financial impacts of climate change. We want to know what you think about it.

It seems to have appointed itself as an authority on climate change instead and personally I find that a bit concerning. After all it’s role is elsewhere.

The UK Gilt Market

For newer readers UK government bonds are called Gilts because it is short for Gilt-Edged from the days they were backed by Gold. Actually technically that is still true as we have some Gold but the edge is very thin these days! Sadly we managed to sell a fair bit of our reserves at what was pretty much the low in the modern era.

However at a time like this the media would normally be running headlines, like Gilt market plunges. We have quite a few possible reasons for one to happen right now and I have worked through many episodes where prices plunged and yields soared. If you like what is now called the “bond vigilantes” turned up and had market power. Also let me add a nuance which is that as I will explain in the UK Pound £ section part of the situation is true but not all.

In fact we are seeing exactly the reverse as the UK Gilt market has rallied and indeed has done so strongly. Our benchmark ten-year Gilt yield has dipped below 1% this morning. So if we go back to my subject of the 16th of this month this is rather curiously a risk-off move. Putting it another way the UK Gilt future has rallied some two and a half points since the lows of early this month and is around 129.5 as I type this.

So people can borrow cheaply again in institutional markets and that suggests we will see lower fixed-rate mortgages and business borrowing rates. The five-year yield is a signal for those and it has fallen from 0.95% on the sixth of this month to 0.75% now. So if this stays I expect a burst of lower mortgage-rates. Also a yield of 0.75% which is the same as Bank Rate is awkward for a Bank of England trying to gain traction with this.

The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report
projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited
extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon

Presently markets are pricing in an “ongoing tightening” of zero. Ironically that is due to expectations or fears depending on your point of view that it will undertake more QE style Gilt purchases adding to its current £435 billion.

The UK Pound

This has been in a weak run since the 3rd of this month when it rallied to US $1.317. Men At Work must have been singing “It’s a mistake” because it has been slip-sliding away ever since and is now at US $1.263. So we can open with by noting that as most commodity prices are in US Dollars then we are seeing some producer price inflation pressure to add to this reported yesterday.

The growth rate of prices for materials and fuels used in the manufacturing process was 3.8% on the year to April 2019, up from 3.2% in March 2019.

Actually the reports I have received suggest that at least some of the selling has come from the Far East mostly versus the Yen. This is consistent with our fall from over 146 Yen to 139 Yen over the same time frame as above. However linking to the Gilt market that would usually in the past be accompanied by Gilt sales except if they have it has been singing along with Rod Stewart.

Them homesick blues and radical views
Haven’t left a mark on you, you wear it well.

Moving to the trade-weighted or effective exchange rate we are still a fair way above the October 2016 low and appear to be range trading if you look at the overall period. We are still up in 2019 as well but if we move to the more recent period we see that using the old Bank of England rule of thumb we have received the equivalent of a 1% Bank Rate cut. Make you think doesn’t it?

UK FTSE 100

This is a more curious beast these days via the number of companies in it that trade overseas and benefit form a lower value for the UK Pound. So until today it has pretty much sailed through the May storm. I say until today as it is down 100 points today but that is in percentage terms 1.3% which compares to a 1.9% fall for the German Dax index so it is probably very little to do with UK domestic issues. We can exclude some of the currency effect by moving to the FTSE 250 index but the truth is that over the May storm it has only fallen slightly until today’s “trade war” move.

However there is a more troubled sector and it is one of our themes, or the zombified banking sector. Let me illustrate via Barclays where I recall a friend be long shares during the crash and then suggesting selling on the bounce above £3. I am not writing that to be clever but to give some perspective on the current price of £1.48 which is down 3% today. During our May perspective it has been a case of what the Rolling Stones would call Tumbling Dice from the £1.65 of the third of this month. After all aren’t we supposed to have been in a decade long recovery?

It was only yesterday that I was nice to Royal Bank of Scotland but that £800 million dividend is not much compensation for a £2.13 share price when you invested at a fiver.

In Bank of England speak this is called being “resiliient”

Comment

As you can see we are seeing further ch-ch-changes. The clearest is the Gilt market which is rallying into events that used to cause falls and plunges. Overall the stock market does not seem that bothered either. So the headline writers have only the falling UK Pound and of course many of them still have singed fingers in this area, as for example the Financial Times is still short it five cents lower than here. The banks are an exception as “The Precious” seems to lack people willing to back it with their money, can anybody think why?

Returning to the Bank of England it has been doing some number crunching and its effort to explain the inflation data is welcome. Although the more thoughtful might wonder where house prices are? Also they may wonder if the days of football tickets in the inflation measure are marked?

Meanwhile the cost of watching football has rocketed. Over the same period the price of a match ticket has increased more than six times, or around 8% each year.

Also the new green central banking agenda might like to address why the price of a light bulb has gone up 140% since 2010?

One category that feels a little gory is home killed shoulder of lamb. Also I am a non-smoker but even I know they are not sold in eights or fifteens.

Me on The Investing Channel

 

 

 

 

The fall in the price of crude oil is a welcome development for UK inflation

One of the problems of official statistics is that we have to wait to get them. Of course numbers have to be collected, collated and checked and in the case of inflation data it does not take that long. After all we receive October’s data today. But yesterday saw some ch-ch-changes which will impact heavily on future producer price trends as you can see below.

Oil traders’ worries over record supplies arriving in Asia just as the outlook for its key growth economies weakens have pulled down global crude benchmarks by a quarter since early October. Ship-tracking data shows a record of more than 22 million barrels per day (bpd) of crude oil hitting Asia’s main markets in November, up around 15 percent since January 2017, and an increase of nearly 5 percent since the start of this year.

Not only is supply higher but there are issues over likely demand.

China, Asia’s biggest economy, may see its first fall in car sales on record in 2018 as consumption is stifled amid a trade war between Washington and Beijing.

In Japan, the economy contracted in the third quarter, hit by natural disasters but also by a decline in exports amid the rising protectionism that is starting to take its toll on global trade.

And in India, a plunging rupee has resulted in surging import costs, including for oil, stifling purchases in one of Asia’s biggest emerging markets. India’s car sales are also set to register a fall this year.

You may note along the way that this is a bad year for the car industry as we add India to the list of countries with lower demand. But as we now look forwards supply seems to be higher partly because the restrictions on Iran are nor as severe as expected and demand lower. Does that add up to the around 7% fall in crude oil benchmarks yesterday? Well it does if we allow for the fact that it seems the market has been manipulated again.

Hedge funds and other speculative money have swiftly changed from the long to the short side.

When the bank trading desks mostly withdrew from punting this market it would seem all they did was replace others. Of course OPEC is the official rigger of this market but its effort last weekend did not cut any mustard. So we advance with Brent Crude Oil around US $66 per barrel and before we move on let us take a moment for some humour.

As recently as September and October, leading oil traders and analysts were forecasting oil prices of $90 or even $100 a barrel by year-end.

Leading or lagging?

The UK Pound £

This can be and indeed often is a powerful influence except right now as the film Snatch put it, “All bets are off!” This is because it will be bounced around in the short-term ( and who knows about the long-term) by what we might call Brexit Bingo Bongo. Personally I think the deal was done weeks and maybe months ago and that in Yes Prime Minister style the Armistice celebrations gave a perfect opportunity to settle how it would be presented to us plebs. For those who have not seen Yes Prime Minister its point was such meetings are perfect because everybody thinks you are doing something else. The issue was whether it could be got through Parliament which for now is unknown hence the likely volatility.

Producer Prices

These are the official guide to what is coming down the inflation pipeline.

The headline rate of output inflation for goods leaving the factory gate was 3.3% on the year to October 2018, up from 3.1% in September 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 10.0% on the year to October 2018, from 10.5% in September 2018.

Except if we now bring in what we discussed above you can see the issue at play.

Petroleum and crude oil provided the largest contribution to both the annual and monthly rates of inflation for output and input inflation respectively.

They bounce the input number around and also impact on the output series.

The monthly rate of output inflation was 0.3%, with the largest upward contribution from petroleum products (0.14 percentage points). The monthly growth for petroleum products rose by 0.5 percentage points to 2.0% in October 2018.

Actually the impact is higher than that because if we look at another influence which is chemical and pharmaceutical products they too are influenced by energy costs and the price of oil. So next month will see quite a swing the other way if oil price remain where they are. We have had a 2018 where oil prices have been well above their 2017 equivalent whereas now they are not far from level ( ~3% higher).

Inflation now

We saw a series of the same old song.

The all items CPI annual rate is 2.4%, unchanged from last month……..The all items RPI annual rate is 3.3%, unchanged from last month.

This was helped by something especially welcome to all but central bankers who of course do not partake in any non-core activities.

Food prices remain little changed since the start of 2018 and fell by 0.1% between September and October 2018 compared with a rise of 0.5% between the same
two months a year ago.

Happy days in particular if you are a fan of yoghurt and cheese. The other factor was something which an inflation geek like me will be zeroing in on.

Clothing and footwear, where prices fell between September and October 2018 but rose between
the same two months a year ago.

There is an issue of timing as we are in the Taylor Swift zone of “trouble,trouble,trouble” on that front but this area is a big issue in the inflation measurement debate. Let me look at this from a new perspective presented by Sarah O’Connor of the FT.

Online fast-fashion brands have enjoyed success catering to what Boohoo calls the “aspirational thrift” of young millennials. They sell clothes that are often made close to home so that they can be produced more quickly in response to customer trends. “Our recent evidence hearing raised alarm bells about the fast-growing online-only retail sector,” said Mary Creagh, the committee’s chair. “Low-quality £5 dresses aimed at young people are said to be made by workers on illegally low wages and are discarded almost instantly, causing mountains of non-recycled waste to pile up.”

This is a direct view on the area of fast and often disposable fashion which is one of the problem areas of UK inflation measurement. There are issues here of poverty wages and recycling. But the inability of our official statisticians to keep up with this area is a large component of the gap between CPI and RPI, otherwise known as the “formula effect”.

Comment

The fall in the price of crude oil is a very welcome development for the trajectory of UK inflation. Should it be sustained then we may yet see UK inflation fall back to its target of 2% per annum. For example the price of fuel at the pump is some 10 pence per litre higher than a year ago for petrol and 14 pence per litre higher than a year ago for diesel, so the drop is not in the price yet. That may rule out an influence for November’s figures but we could see an impact in December. Other prices will be influenced too although probably not domestic energy costs which for other reasons only seem to go up. But as we looked at yesterday the development would be good for real wages where we scrabble for every decimal point.

Meanwhile I have left the “most comprehensive” measure of inflation to last which is what it deserves. This is because the CPIH measure ignores a well understood and real price – what you pay for a house – which is rising at an annual rate of 3.5% and replaces it with Imputed Rents which are never paid to get this.

The OOH component annual rate is 1.1%, up from 1.0% last month.

But I do not need to go on because the body that has pushed for this which is Her Majesty’s Treasury which plans to save a fortune by using it may be having second thoughts if it’s media output is any guide.

 

How the Bank of England eased monetary policy yesterday

Yesterday something happened which is rather rare a bit like finding a native red squirrel in the UK. What took place was that part of the Forward Guidance of the Bank of England came true.

At its meeting ending on 1 November 2017, the
MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%.

Not really the “sooner than markets expect” of June 2014 was it? Also of course it was only taking Bank Rate back to the 0.5% of them. Or as it was rather amusingly put in the comments section yesterday the Bank of England moved from a “panic” level of interest-rates to a mere “emergency” one!

Problems

It was not that two Monetary Policy Committee members voted against the rise that was a problem because as I pointed out on Wednesday they had signalled that. It was instead this.

All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

In itself it is fairly standard central bank speak but what was missing was an additional bit saying something along the lines of “interest-rates may rise more than markets expect”. Actually it would have been an easy and cheap thing to say as expectations were so low. This immediately unsettled markets as everyone waited the 30 minutes until the Inflation Report press conference began. Then Governor Carney dropped this bombshell.

Current market yields, which are used to condition our forecasts, incorporate two further 25 basis point increases over the next three years. That gently rising path is consistent with inflation falling back over the next year and approaching the target by the end of the forecast
period.

This was a disappointment to those who had expected a series of interest-rate rises along the lines of those from the US Federal Reserve. Some may have wondered how a man who plans to depart in June 2019 could be making promises out to 2021! Was this in reality “one and done”?

Added to this was the concentration on Brexit.

Brexit remains the biggest determinant of that outlook. The decision to leave the European Union is already having a noticeable impact.

The latter sentence is true with respect to inflation for example but like when he incorrectly predicted a possible recession should the UK vote leave the Governor seems unable to split his own personal views from his professional  role. This gets particularly uncomfortable here.

And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

The new “speed limit” for the UK economy of 1.5% per annum GDP growth comes from exactly the same Ivory Tower which told us a 7% unemployment rate was significant which speaks for itself! Or that wage increases are just around the corner every year. In a way the fact that the equilibrium unemployment rate is now 4.5% shows how wrong they have been.

The UK Pound

The exchange-rate of the UK Pound £ had been slipping before the announcement. As to whether this was an “early wire” from the long delay between the vote and the announcement or just profit-taking is hard to say. What we can say is that the Pound £ dropped like a stone immediately after the announcement to just over US $1.31 and towards 1.12 versus the Euro. Later after receiving further confirmation from the Inflation Report press conference it fell to below US $1.306 and to below Euro 1.12.

If we switch to the trade-weighted or effective index we see that it fell from the previous days fixing of 77.76 to 76.44. If we use the old Bank of England rule of thumb that is equivalent to a Bank Rate reduction of around 1/3 rd of a percent.

UK Gilt yields

You might think that these would rise in response to a Bank Rate change but this turned out not to be so. The cause was the same as the falling Pound £ which was that markets had begun to price in a series of increases and were now retreating from that. Let us start with the benchmark ten-year yield which fell from 1.36% to 1.26% and is now 1.24%. Next we need to look at the five-year yield because that is often a signal for fixed-rate mortgages, It fell from 0.83% to 0.71% on the news.

The latter development raised a smile as I wondered if someone might cut their fixed-rate mortgages?! This would be awkward for a media presenting mortgage holders as losers. This applies to those on variable rates but for newer mortgages the clear trend has been towards fixed-rates.

But again the conclusion is that post the decision the fall in UK Gilt yields eased monetary policy which is especially curious when you note how low they were in the first place.

This morning

Deputy Governor Broadbent was sent out on the Today programme on BBC Radio 4 to try to undo some of the damage.

BoE’s Broadbent: Anticipate We May Need A Couple More Rate Rises To Get Inflation Back On Track – BBC Radio 4 ( h/t @LiveSquawk )

The trouble is that if you send out someone who not only looks like but behaves like an absent-minded professor the message can get confused. From Reuters.

The Bank of England’s signal that it may need to raise interest rates two more times to get inflation back toward the central bank’s target is not a promise, Bank of England Deputy Governor Ben Broadbent said on Friday.

Then matters deteriorated further as “absent-minded” Ben claimed that Governor Carney had not said that a Brexit vote could lead to a recession before the vote and was corrected by the presenter Mishal Husain. I do not want to personalise on Ben but as there have been loads of issues to say the least about Deputy Governors in the recent era from misrepresentations to incompetence what can one reasonably expect for a remuneration package of around £360,000 per annum these days?

Here is a thought for the Bank of England to help it with its “woman overboard” problems. The questioning of Mishal Husain was intelligent and she seemed to be aware of economic developments which puts her ahead of many who have been appointed……

Comment

There is a lot to consider here as we see that the Bank Rate rise fitted oddly at best with the downbeat pessimism of Governor Carney and the Bank of England. Actually in many ways  the pessimism fitted oddly with the previous stated claim that a Bank Rate rise was justified because the economy had shown signs of improvement. On that road the monetary score is +0.25% for the Bank Rate rise then -0.33% for the currency impact and an extra minus bit for the lower Gilt yields leaving us on the day with easier monetary policy than when the day began.

Today saw another problem for the Bank of England as some good news for the UK economy emerged from the Markit ( PMI) business surveys.

The data point to the economy growing at a
quarterly rate of 0.5%, representing an
encouragingly solid start to the fourth quarter.

How about simply saying the economy has shown strengthening signs recently and inflation is above target so we raised interest-rates? Then you keep mostly quiet about your personal views on the EU leave vote on whichever side they take and avoid predictions about future interest-rates like the Bank of England used to do. Indeed if you have an Ivory Tower which has been incredibly error prone you would tell it to keep its latest view in what in modern terms would be called beta until it has some backing.

Oh and as to the claimed evidence that private-sector wages are picking up well the official August data at 2.4% does not say that and here is a song from Earth Wind and Fire which covers the Bank of England’s record in this area.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away