Is the Bank of England on a road to another Bank Rate cut?

Yesterday was a rather extraordinary day at the Bank of England and in some respects lived up to the Super Thursday moniker although by no means in the way intended. The media dropped that phrase at exactly the wrong moment. The irony was that for once they may have done the right thing in not raising interest-rates but what this exposed was the ineptitude and failures of their past rhetoric promises and hints. The regime of Forward Guidance can not have been much more of a failure as it found itself being adjusted yet again.

the MPC judges that an ongoing, modest tightening of monetary policy over the forecast period will be
appropriate to return inflation sustainably to its target at a conventional horizon.

Let us mark the obvious problem with the use of ongoing when the Bank Rate is still at the emergency level of 0.5% the Term Funding Scheme is at circa £127 billion and we have £435 billion of QE Gilt holdings and look at what they said in February and the emphasis is mine.

The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report,

So the timing element was wrong and so was the amount which doesn’t really leave much does it?

But things got worse at the press conference because in his attempt to explain this Governor Carney exposed Forward Guidance as an emperor with no clothes. In an exchange with Harry Daniels of LiveSquawk Governor Carney told us that his words were really only for financial markets and implied that they were big enough boys and girls to make their own views. He then contrasted with the ordinary person clearly implying they would not. Seeing as Forward Guidance was supposed to connect with the ordinary person and business Governor Carney torpedoed his own ship there. Also when he later tried to claim people and businesses do listen to him he unwittingly admitted he had misled them,

The people we speak to first and foremost are households and businesses across the country. [They] don’t trade short-sterling. They are not fixated on whether we raise rates on May 10 or at the end of June ( The Times).

They might reasonably have been fixated on his rate rise rhetoric back in June 2014 after all if they could have nearly taken out a couple of 2-year fixed-rate mortgages since then to protect themselves against the interest-rate rises which never happened.

A bizarre element was added on the issue of him talking at 6 pm to the BBC when many UK markets are closed as the Governor tried to claim it was okay because some markets such as the UK Pound £ were traded 24/7. This of course did not address at all the ones that are closed or the lack of liquidity at such times in the ones that are.

Weather or whether?

This got the blame.

The MPC’s central assessment is that it largely reflects the former, and that the underlying pace of growth remains more resilient than the headline data suggest.

The problem here is of course if they really believed that then they should have raised interest-rates! Also it directly contrasted with what our official statisticians had told us a few hours before.

Today’s figures support previous estimates showing the economy was very sluggish in the first quarter of 2018, with little impact overall from the bad weather.

Unreliable Boyfriend

This subject was raised several times and one of them got a rather bizarre response.

Shade from MC: “The only people who throw that term [unreliable boyfriend] at me are in this room” ( @birdyworld )

We do not even need to look beyond the boundaries of this website to know that such a statement is untrue and even the BBC uses the term. The Governor had opened the press conference by shiftily looking around the room before as several people rather amusingly suggested to me talking out of both sides of his mouth. Indeed the man formerly praised for his good looks and for being a rock star central banker seems to have lost the female vote too if this from Blonde Money is any guide.

Carney the ever unreliable boyfriend

There was an alternative view which I doubt the Governor will prefer.

The people outside the room say “who are you” ( @birdyworld )

Especially as it is from someone who thinks he has done a good job.


There was another odd turn here as Governor Carney went into full Ivory Tower mode and said that the Monetary Policy Committee only looked at regular wages. As it is not that frequent an event let me echo the words of Danny Blanchflower on this subject.

idiotic – workers only care about what is in their pay packet – so you take out the part of pay that varies and then tell us what is left doesn’t vary No other country in the world uses such a dumb measure.

Even worse the Governor tried to say that wages had progressed in line with the forecasts of the Bank of England but this is only if you cherry pick the data. For example the latest month for which we have figures is February and if you take the Governor’s line and look at private-sector regular pay the annual rate of increase was 3%. However if you look at pay across the economy ( and as it happens the private-sector)the annual rate of increase was 2.3%. Will people ignore what was once called “the pound in your pocket” and instead break up the notes and coins into separate piles?

The absent-minded professor

Ben Broadbent is called into play at the press conferences if the going gets tough. His role is twofold being partly to expound widely on minor details to waste time and in a related effort to make the viewers and attendees drowsy if not numb. Sadly I was not that to point out that his rhetoric on Asia ignored Japan where many fear a contraction in the first quarter GDP data due you guessed it to the weather.

He has also been on the Today programme this morning on BBC Radio Four. This seems unwise as people have just got up and do not want to be sent back to sleep but if we move on from that there is this.

BoE’s Broadbent: Message Is That Rate Hikes Will Be Gradual ( @LiveSquawk )

How long can you keep saying that when in net terms there have not been any?

It is entirely the sensible thing to do, to wait to see whether we are right that the economy will bounce back from here, and for me the decision was straightforward

So it was the weather or it wasn’t? Moving on from that is the contrast with August 2016 when Ben appeared somewhat panic-stricken and could not cut rates fast enough where was the waiting for a ” bounce back from here,” then Ben? He also wanted to cut further in November 2016 before of course even he was calmed by the actual data.

On a deeper level I would just like to point out that it was wrong to move Professor Broadbent from being an external member to an internal one. Otherwise external member of the MPC may be influenced by potential sinecures from the Governor which makes their existence pointless.


The road to a Bank Rate cut and possibly more QE Gilt purchases is simple and it merely involves the current weak patch for the economy persisting. As I have pointed out before the monetary growth numbers have been weakening which suggests the summer and early autumn may not be that good. It is also true that more than a few of our trading partners are seeing a weaker phase too as for example we saw this from France on Wednesday.

Manufacturing output fell sharply over the first
quarter of 2018 (−1.8%)

That leaves it with a similar position to the UK where a better phase seems to have ended at least for now. We know from August 2016 that it will not take much more of this for the Bank of England to look at easing policy in sharp contrast to the nearly four years of unfulfilled Forward Guidance about rises.

I don’t care if you never come home,
I don’t mind if you just keep on
Rowing away on a distant sea,
‘Cause I don’t love you and you don’t love me. ( Eric Clapton)

Meanwhile the consequences continue to build up.

Forty-somethings are now almost twice as likely to be renting from a private landlord than they were 10 years ago.

Rising UK house prices have left many middle-age workers unable to afford a first home,  ( BBC )





What are the prospects for UK house prices?

This year has the potential to be one where there are ch-ch-changes in the UK housing market. What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls. Even the estate agent sector has shifted to suggesting only minor price increases and of course they have a large moral hazard of never being keen to forecast price declines! Back on November 4th last year I offered a critique of this as Savills told us this.

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

They were telling us this in my opinion because otherwise the forecast below would not do business much good.

Savills said (house) prices would be flat in 2017 in the capital and elsewhere…

Actually as I pointed out on the 8th of December house prices in central London had already gone from the only way is up to fallin’.

On Monday, property firm Knight Frank said prices in prime London postcodes had fallen by 4.8% in the year to November, and were set to end the year 6% down. In Chelsea, prices have dropped by 12.6% over the past year, it said, while around Hyde Park values are down by 11.2%. It forecast that across the market prices will remain flat in 2017.

I plan to cycle past the large Nine Elms development later which stretches from Battersea Dogs Home to Vauxhall and includes the new American and Dutch embassies and it will provide food for further thought. I would like to know for example the exact numbers behind this being reported by the Foxtons estate agency.

Property prices in Nine Elms have increased by 3.58% over the past year.

Should someone want to take the advice of Blur below there are also challenges ahead.

City dweller, successful fella
Thought to himself oops I’ve got a lot of money
I’m caught in a rat race terminally………….

He lives in a house, a very big house in the country

That plan seems to have trouble ahead if this from KnightFrank is any guide.

Prime country property values fell by 0.4% between October and December, the third consecutive quarter in which prices have fallen……As a result values ended 2016 marginally lower, falling by around 0.4% on average compared with the 12 months to December 2015.

Will this spread wider?

I think so although there are different issues as we move from prices which are in effect set internationally these days to ones which are much more domestic.

Inflation and hence real wages

The likely trend for real wages is down this year and that will pose its own problems for house prices and affordability. We got quite a strong hint from Germany yesterday as shown below from Destatis.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2016. Compared with November 2016, consumer prices are expected to increase by 0.7%.

As you can see there was quite a pick-up and whilst there are domestic issues the international ones will be stronger for the UK because the UK Pound fell against the Euro overall last year. Accordingly unless wages can increase we will see real wage falls in 2017 in the UK putting a squeeze on budgets.

Mortgage Rates

Last year we one of record lows for mortgage rates in the UK as the Bank of England under Governor Carney added further to the measures reducing them. The ongoing £60 bank mortgage lending subsidy called the Funding for Lending Scheme (FLS) found itself accompanied by a 0.25% Bank Rate cut, an extra £60 billion of QE ( Quantitative Easing) and some corporate bond QE. Thus Mark Carney and his colleagues had a go at emptying the house price support cupboard. Actually they also added the Term Funding Scheme to give another bank subsidy which so far has provided some £20.7 billion to them.

But the winds of change have blown as we note the international trend to higher bond yields and hence mortgage rates. This has been led by the impact of the expected policies of President-Elect Trump and the December interest-rate rise of the US Federal Reserve. As ever the short-term picture is complex as a bond market rally at the end of 2016 was followed by falls this week but the UK ten-year Gilt yield was driven down to nearly 0.5% by the “Sledgehammer” of the Bank of England is now 1.32% which gives the bigger picture of rises. Also it means that our “dedicated follower of fashion” Mark Carney picked an out of date line.

Government policy

This has shifted in a couple of ways. Firstly we saw changes in Stamp Duty on second homes then we saw changes in affordability criteria for buy-to-let mortgages. In April we will see tax relief on mortgage interest payments reduced to being only at the basic rate as well. More generally much of the Help To Buy policy ended with 2016.

We do not know how the new government would respond to house price falls but so far it does not seem as obsessed with the housing market as its predecessor.

Starter Homes

One area where the current government is following past policy is in the rehash and reannouncement of the Starter Homes policy and the announcement of the new Garden Villages. The simple truth is that governments of all types in the UK have made loads of similar proclamations but very little extra building if any has actually taken place.

Today’s data

The latest Bank of England numbers show that the market is trying to hang on in there.

The number of loan approvals for house purchase was 67,505 in November, compared to the average of 64,178 over the previous six months…….Lending secured on dwellings increased by £3.2 billion in November, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively

That would not be far off a steady as she goes position if we missed that this was for November and so the main changes are still in the future.

Unsecured credit

Here we find yet another side-effect of the housing friendly policies of the Bank of England. Please do not adjust your sets and I hope you are sitting comfortably.

Consumer credit increased by £1.9 billion in November, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.4% and 10.8% respectively.

This is a clear consequence of the Bank of England opening the monetary taps and in the past has led us into trouble. We do not get a breakdown of what the lending if for but I believe a lot of it goes into the record numbers for motor car registrations. Although I do recall the claim a while back that this was in fact secured credit. An odd description where the first drive alone is accompanied by a boot full of depreciation.


We see that it is not just the weather which is producing some chill winds right now as the outlook for the housing market is the same. Not perhaps the plummet predicted by our £30,000 a speech former Chancellor but a fading then stagnation then fall. Even the Consumer Price Index is likely to exceed house price growth this year.

However I am someone who would welcome a phase of mild house price falls. Why? Well the official house price series explains as I note that an average house price of £150,633 in January 2005 was replaced by one of £216,674 last October. There are of course many regional differences with Central London leading and Northern Ireland lagging but overall we see an asset price which has completely decoupled from the real economy. Of course this is Bank of England policy and an area where I strongly disagree with them. Actually as this from Mark Carney implies they are trying to have their cake and eat it.

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters.

Why have you pushed them further up then Mark?

Will this be seen as the sterling crisis of 2016?

Sometimes events overtake us to some extent and the recent move has been a further fall in the value of the UK Pound £. Whenever this happens then old fears come to the surface and in many ways they are right to because such events have a mostly bad track record for the UK economy. However some things have changed as in the past we either had a fixed exchange rate or elements of one which meant that a problem, usually with the balance of payments could very quickly become a crisis as it did in 1967. Ironically later statistical revisions told us that it was in fact not necessary. Oh well!

This morning has seen the media out in full force on the subject of a lower UK Pound. From the BBC.

The pound dipped to $1.2766 in early trading on Tuesday – its lowest level against the US dollar since 1985.

Sterling has fallen sharply for the past two days as traders look to the Conservative Party conference for Brexit details.

Also the Financial Times.

The pound has skidded to a new three-decade low against the dollar as fears grow of a “hard” Brexit and its potential impact on the UK economy…..The pound has dropped 0.5 per cent against the greenback so far this morning to $1.2776, its lowest level since 1985.

The FT even gives us two reasons why.

a decline that has reflected the sharp deterioration in the outlook for the UK economy as well as expectations of further easing from the Bank of England.

I will come to the Bank of England in a moment but “sharp deterioration” is an interesting phrase from an organisation which you think might have been taught some humility by economic events so far after the vote to leave the European Union in the UK.

What about the Bank of England?

It should in my view be having a serious rethink this morning about its actions as its proclaimed “sledgehammer” for its monetary policy has no doubt contributed to pushing the UK Pound lower. I pointed out on BBC Radio 4’s Money Box program just over a fortnight ago that the lower UK Pound’s effect on the UK economy would be a “bazooka” compared to their “pea shooter” but even so some of the dimmer members at the Bank of England have been unable to restrain themselves. It was only on Thursday that I quoted these words from Dame Nemat Shafik and the emphasis is mine.

the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

Such pronouncements could be from the film “Dumb and Dumber” when you have already eased policy and have seen a substantial fall in your currency. Especially when you admit that things so far have turned out better than you had expected.

Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

Should tomorrow’s services PMI (Purchasing Mangers Index) turn out to be as strong as the manufacturing one (55+) and the construction one this morning which saw  a return to growth another Forward Guidance embarrassment will likely be in play.

How much has the UK Pound fallen?

If we look to the effective or trade-weighted exchange-rate we see that as of last night’s close it had fallen to 76.7 which compares to 87.7 on the day before the EU leave vote and 90.4 on the last day of 2015. As ever we have fallen by more against some of which one must be the Japanese Yen and maybe even gained against one or two such as the Nigerian Naira but not many.

What is the economic impact of this?

Applying the old Bank of England rule of thumb gives us a monetary policy stimulus equivalent to a 3% Bank Rate cut since the vote and one of around 3.4% since 2016 began. However this is a boost to both inflation and economic growth or if you like nominal output. To get the real gain we need to know how much of it will be inflation. Back on the 19th of July I did some calculations.

If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

As we have fallen since then my estimate may now go as high as 1.5% for the boost to annual inflation. Many factors are of course in play here and as we look at the numbers now a price for Brent Crude Oil of over US $50 per barrel does not help when you are buying with depreciated UK Pounds!

By contrast the output boost is much harder to get a handle on. We do get some evidence as this from the Markit Manufacturing PMI shows.

The weak sterling exchange rate remained the prime growth engine, driving higher new orders from Asia, Europe, the USA and a number of emerging markets…..the weaker pound also bolstered export orders which increased at the steepest rate for 32 months.

There was also some evidence of this in last month’s services PMI release.

Companies linked greater demand to new clients, higher export business linked to the weak pound, higher domestic tourism and returning confidence following initial disruption related to the Brexit vote.

We of course await tomorrow’s update on what happened in September.


Let me return to my title and look at the issue of a sterling crisis. A real old-fashioned one in the style of 1967 cannot happen now as we do not have any element of a fixed exchange-rate. Whilst we can still have a balance of payments crisis the thresholds are much much higher now. Technically we have had a depreciation rather than a devaluation. If we compare to the depreciation which followed the collapse of the Northern Rock Building Society then not that either as the UK Pound fell from an effective exchange-rate of 105 in July 2007 to 77 in March 2010. Oddly a rather similar number to now. If we go back to 1992 the fall then was larger as well as we fell from 98 in July of that year to 81 in February 1993 as we first fell within our ERM ( Exchange Rate Mechanism ) band and then fell out of it completely.

Thus in terms of past sterling crises this is relatively small so far and of course events may change course or get worse. One factor that is at play here is the world economy which is showing some good signs as for example China rumbles on and we see in response changes in the commodity price pattern. But on the other hand there is the issue of why the Reserve Bank of India has today cut interest-rates from 6.25% to 6% meaning that @ReutersJamie can tell us this.

It’s only Oct 4, but India’s rate cut today means central banks have already eased policy more times this year (102) than last year (101).

According we wait to see if the next pattern will be more like 1992 (good) or 2007/09 (not so good). Here is some perspective from Macro Trends






For the Bank of England the only way is up for UK house prices

A major factor in the UK economy is the behaviour of house prices.  These are seen by the UK establishment as a bell weather for the state of the economy itself. The Bank of England Underground Blog offered us these insights back last December.

What explains the strong comovement between the housing market and the labour market in the UK?

it is essential to better understand the drivers of the striking comovement between house prices and labour markets in the UK.

So there is a clear implied view that is you stop house price falls then you are likely to stop unemployment rising. That explains the way that the Bank of England introduced the Funding for Lending Scheme in the summer of 2013 which reduced mortgage rates by up to 2% by its own estimates and sent house prices higher again. Perhaps it also explains this type of rhetoric when he was Chancellor from George Osborne. From the Financial Times on May 20th..

A vote to leave the EU would hit UK house prices by between 10 per cent and 18 per cent, George Osborne has warned, in an escalation of the referendum rhetoric.

So we were supposed to then fear a rise in unemployment? Actually it was never quite as badged because in fact it was a reduction from expected growth.

The Treasury estimates that, by mid-2018, house prices would be at least 10 per cent below their expected trend.

So let us take a look at the evidence so far as we mull the fact that even though this was just rhetoric the Bank of England was so affected by it that it produced a “sledgehammer”.


The Nationwide has offered us its thoughts on the state of play in August.

UK house prices increased by 0.6% in August, resulting in a slight pick up in the annual rate of house price growth to 5.6%, from 5.2% in July, although this remains within the 3- 6% range prevailing since early 2015.

So much more “same as it ever was,same as it ever was” (Talking Heads) than “end of the world as we know it” (REM) on a price measure. As to the future the Nationwide spends quite a few paragraphs telling us that it does not know.

There was one interesting change to note which is this.

However, the decline in demand appears to have been matched by weakness on the supply side of the market.

So for all the furore about prices it is in fact quantity where we are seeing some action and of course this feeds into an existing trend after the spring Stamp Duty changes. Indeed it has led to this.

Surveyors report that instructions to sell have also declined and the stock of properties on the market remains close to thirty-year lows.

Of course lower volumes could be because even on the highly favourable definition used the first time buyer house price to earnings ratio has hit 5.3. Some of that is due to london rising to a breathtaking 10.4 but by no means all of it.

Mortgage Approvals

The Bank of England was singing the same song yesterday as it told us this.

The number of loan approvals for house purchase was 60,912 in July, compared to the average of 68,775 over the previous six months.

So another sign of a quantity fall which has been translated pretty much everywhere as a sign of lower prices to come although as noted above if supply remains low that may be much less certain. Also for completeness  net mortgage volumes fell.

Lending secured on dwellings increased by £2.7 billion in July, compared to the average of £3.5 billion over the previous six months

However care is needed because gross mortgage volumes rose ( not by much but rose) and the change was that repayments were higher by £1.6 billion in July compared to June.

The Bank of England

We now need to consider the Bank of England response to this as we know that it sees the housing market not only as a bell weather but also as a powerful causative agent.

These uncertainties are expected to cause: some companies to delay major decisions such as investment and hiring plans; lower house prices; and less spending by households.

The opening salvo was provided by this.

A cut in Bank Rate from 0.5% to 0.25%

So tracker mortgages will respond to this and may have already cut but for new mortgages the impact of this is very minor as the Mortgage Advice Bureau has reported.

The wealth of product availability, coupled with rock bottom rates has led to the overwhelming majority of people fixing their mortgage; those remortgaging and fixing dropped slightly in July to 88.4%, down from 90.7% in June, with 93.2% of purchase applicants opting for a fixed deal.

The variable rate to fixed rate picture has in fact shifted substantially according to the Nationwide.

The proportion of mortgage balances on variable rate products is lower than average at present (c.45% compared to an average of around 60% since 2001).

Thus we see that the Bank Rate weapon has weakened over time which means that the Bank of England is using other tactics and here is this afternoons effort.

Date of operation 31/08/16 Total size of operation Stg 1,170mn

Stocks offered for purchase UKT_2.25_070923 UKT_2.75_070924 UKT_2_070925 UKT_6_071228 UKT_4.75_071230

This is the current effort to reduce the interest-rate on fixed-rate mortgages which is having an impact. For example whilst you need a 50% deposit the Coventry has offered a 7 year fixed rate mortgage at just below 2% (1.99%). That is the mortgage market flip-side of a UK seven-year Gilt yield of less than 0.5%.

If you look at the UK’s past track record and also likely trends for inflation you can see why people are going for fixed-rate mortgages at this time. It is also noticeable that those doing so now have benefitted from ignoring the Forward Guidance of Bank of England Governor Mark Carney who of course promised interest-rate rises and then cut.

Term Funding Scheme

This does not yet actually exist but seems likely to be the bazooka for the housing market or the real “sledgehammer” of Bank of England Chief Economist Andy Haldane. Somewhat awkwardly for Bank of England pronouncements that the UK economy needs urgent help it does not start until September 19th! Central bankers must have their holidays it seems. But the Nationwide seems to have nailed down what it will achieve.

The creation of the new Term Funding Scheme is also important, as it means that lenders will have guaranteed access to low cost funding from the Bank of England, which should help ensure the supply of credit is maintained.

They of course mean the supply of credit to mortgages.


Let me hand you over to Bank of England Chief Economist Andy Haldane who told the Sunday Times this over the weekend.

As long as we continue not to build anything like as many houses in this country as we need to … we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.

Actually Andy is forgetting the impact of the policies he so strongly supports but then self-awareness is not one of our Andy’s strengths. “I never have [felt wealthy]”

Haldane owns two homes – one in Surrey and a holiday home on the Kent coast. His basic salary at the Bank is £182,000 and he is in line for a pension of more than £80,000 a year when he retires. (The Guardian).

He has never felt the need for a credit card either. Oh and according to Hargreaves Lansdown if he was more financially literate he might realise this.

Andy Haldane’s pension benefits are estimated to be worth in excess of £3 million, which is not bad going for someone who professes not to even know how pensions work.

Still we at least have a song for Andy’s advice on UK house prices. Cue Yazz.

But if we should be evicted
Huh, from our homes
We’ll just move somewhere else
And still carry on

(Hold on) hold on
(Hold on) hold on
Ooh, aah, baby

(Hold on) hold on
(Hold on) ooh ooh aah

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now



The Bank of England is piling up problems for UK pensions and savers

Yesterday Bank of England Chief Economist Andy Haldane took to The Sunday Times to reinforce his views. Presumably he felt that the print equivalent of more Open Mouth Operations would tell us more about what he means by a monetary “sledgehammer”. In it he offered very cold comfort to savers who will be affected by the interest-rate cuts and QE (Quantitative Easing ) he is such a fan boy of.

Understandably, some savers are feeling short-changed. Although I have enormous sympathy for their plight, the decision to ease monetary policy was, for me, not a difficult one.

Actually punishing savers is not a new policy for the Bank of England as Deputy Governor Sir Charlie Bean – just about to arrive at the Office for Budget Responsibility which is ever more breathtakingly described as independent – told savers this back in September 2010.

Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

Sir Charlie then used the forecasting skills he will apply at the OBR to predict better times ahead for savers.

It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually the swings only go backwards and the roundabouts long stopped spinning. An example of that has happened overnight according to MoneySavingExpert.

Depressing news for savers. Santander 123, the bank account that’s topped savings tables for over four years, will take a hammer to the interest it pays from 1 November. It comes on the back of this month’s base rate cut of 0.25 of a percentage point from 0.5% to 0.25%, but it’s slashing its rate far beyond that, cutting the headline interest from 3% to just 1.5%.

Of course such cuts do not apply to Sir Charlie who has his Bank of England pension linked to the Retail Price Index as well as his salary from the OBR.


The issue here is a consequence of the rise in the price of long-term UK Gilts and the consequent fall in yield. Last week Bank of England Governor Calamity Carney sent in his bond buyers in this area but was gamed by the holders and ended up pushing prices much higher than intended. Of course Andy Haldane will consider this to be a success as he explained to Parliament in from June 2013.

Let’s be clear, we have intentionally blown the biggest government bond bubble in history.

The bubble is of course a lot bigger now and is much larger than any West Han fan will be able to blow later. The thirty-year UK Gilt yield is a mere 1.24% so let us review the consequences for annuities which of course depend on such yields. From This Is Money.

A decade ago, a 65-year-old with a £100,000 pot could get £7,092 a year from an annuity, though without any link to inflation…….At the beginning of July, a 65-year-old saver would have been offered just £4,800 for each £100,000 by insurance giant Legal & General……Today it offers £4,462 a year on the same deal — 8 per cent less than a few weeks ago, according to research by annuity expert William Burrows.

The numbers quoted will be lower should annuitants want inflation protection or to provide an income for their spouse.

A clear consequence of this can be seen below. This is from the Association of British Insurers on the first year of pension freedom where the rules on how you take your pension were relaxed.

£4.3 billion has been paid out in 300,000 lump sum payments, with an average payment of £14,500.
£4.2 billion has been invested in 80,000 annuities, with an average fund of £52,500.

We do not know the individual circumstances behind this but I note that money has shifted from being for future consumption ( an annuity) to presumably consumption now ( cold hard cash). Another way of describing this is borrowing from the future. A problem is that annuities pay out for the rest of you life whereas if you take the money and run it may well run out. Please do not misunderstand me annuity rates now are so poor I can understand why people do not take them and I wonder how many of those taking them are getting higher rates due to ill-health.

As the Bank of England blunders into the UK Gilt market I can only see annuities getting less attractive and looking even poorer value.

The Millennial problem

There is a consequence from all of this from younger workers and present and future pension savers as summed up by Bloomberg.

Younger workers will “have to save more — which they appear reluctant to do — or be prepared to work much longer.”

As I have pointed out before such age groups (millennials are 35 and under) have tended to be more affected by the credit crunch in terms of real wages. So they have less money out of which they are expected to pay more whilst in many cases paying off student debt and facing ever higher house prices. That road leads to such phrases as “Generational Theft”

This will not be helped by the Lifetime ISA situation which as recently as the beginning of this month was described like this by City-AM.

A YouGov poll said that 44 per cent of Britons between the age of 18 and 39 would favour using the government’s new lifetime Isa in order to put money aside for older age. Such a decision would put them on a “collision course” with auto-enrolment.

So even then one government policy was clashing with another. Well today the Lifetime ISA concept itself seems to be struggling. From The Financial Times.

The planned launch of a new savings account for under-40s in April is in doubt after providers warned that the government’s failure to provide key details means they will not have enough time to hit the deadline.

The UK pension system has seen far to many ch-ch-changes and these have progressively weakened confidence in the system. A decade ago I passed one of the advanced examinations on the subject only for there to be changes year after year!

Defined Benefit Pensions

On the 9th of this month I pointed out the pensions desert which would suck up the extra £70 billion of Bank of England QE liquidity.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

We should not be surprised as this as the architect confessed to this only in May.

Yet I confess to not being able to make the remotest sense of pensions. ( Bank of England Chief Economist Andy Haldane).

He and his colleagues are proving it almost daily. Rather like at the Emirates yesterday there is a danger of “You don’t know what you’re doing” being sung.


We see that as I have pointed out many times before the savings and pensions sector of the UK economy have been targeted by the Bank of England. The  doing “very well” promised by the then Mr.Bean back in September 2010 has not only failed to appear things are getting worse. This makes the economy unbalanced and creates real damage as the corporate sector acts to fill pension deficits and younger workers face have to put ever larger sums of money away. Meanwhile though in an Ivory Tower in Threadneedle Street.

The purpose was to support growth and jobs.

No mention of the inflation target Andy? Oh and even he does not seem to think it will work.

At the same time, no one on the MPC is under any illusion that monetary policy can fully insulate Britain from the long-term effects of the decision to leave the EU.

He looks a rather dangerous gambler who by his own confession is responsible for one of the largest shifts of wealth in history.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

Yet apparently the consequences are nothing to do with him and we need ever more. My view on the consequences comes from the Red Hot Chilli Peppers.

Scar tissue that I wish you saw


The Bank of England goes all-in on monetary stimulus

Yesterday the Bank of England announced an extraordinary package of policy measures even for these times. So without delay let us look at the consequences and indeed damage from such moves. But let us do so to a musical theme as we did indeed find out what Chief Economist Andy Haldane meant a few short weeks ago.

I want to be your sledgehammer
Why don’t you call my name
I’m going to be-the sledgehammer
This can be my testimony
I’m your sledgehammer
Let there be no doubt about it

Sledge sledge sledgehammer

There was something of a delay as the Bank of England website collapsed which I hope is not a metaphor for its knowledge of technology. Actually having just checked it the situation is worse than I thought as it is still down as I type this.

The announcement

Here we saw pretty much the whole play book being deployed. Here it is.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.  The last three elements will be financed by the issuance of central bank reserves.

Okay so let us work our way through this.

Firstly the Bank of England has cut Bank Rate to as low as it has ever been in its 322 year history. Next we have yet another bank subsidy which I will analyse in a moment. Then rather oddly we have what might be called a “rave from the grave” as the Bank of England repeats a past ability to buy corporate bonds. The catch is that it did not back then apart from the occasional purchase of £10 million or so  in the summer of 2013 which were usually quickly reversed. Perhaps as the ECB is undertaking such a program Governor Mark Carney saw an opportunity to live up to his description as “a dedicated follower of fashion”. Also you may note that the previous corporate bond effort was very badly timed as the UK economy was improving.

Then we got an announcement of more conventional Quantitative Easing amounting to an extra £60 billion. You might think that if £375 billion did not work then another £60 billion was unlikely to but remember Governor Carney kept telling us that such numbers had been “carefully crafted” . By who and how was left unasked! Anyway let me help out by using the Bank of England’s latest working paper on the subject.

Our focus in this paper, however, is on the second round of purchases between October 2011 and June 2012, when the Bank of England purchased £175 billion of gilts, about 11% of nominal GDP,

Okay so what impact did it have?

We find that the second round of the Bank’s QE purchases during 2011–12……..boosted GDP in the United Kingdom by around 0.5%–0.8%.

So a “carefully crafted” £60 billion will supposedly raise UK GDP by something of the order of 0.2% if the paper is correct. More of a pea shooter than a bazooka isn’t it? That is of course to ignore the side-effects like this.

(The) effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.

If we skip over the central banker speak of higher inflation being a “positive” we see that inflation will be expected to be 0.2% higher as we already mull the side-effects that in my opinion could easily make the  additional QE a subtraction from GDP rather than a boost.

The problem that is final salary pensions

These are valued in terms of the bond yields which the Bank of England is doing its best to drive lower, specifically AA Corporate Bond yields. So as you can see the only thing worse for this than ordinary QE is the Bank of England buying Corporate Bonds. Oops! Here is some analysis of the matter from the Financial Times.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

Ah so a one for one ratio with the planned QE increase! At this point Mark Carney and the Bank of England are wearing a collective Dunces cap. Still they have a plan.

Many companies that saw increased pension deficits were able to extend the period over which they brought them back to balance, maintaining the existing level of contributions.

So kick the can into the future and hope that the problem somehow disappears is apparently the new “carefully crafted”. Also if you mimic an ostrich and stick you head in the sand the problem disappears.

At present, however, those effects appeared to be relatively limited.

Either the Bank of England does not understand final salary schemes – after all didn’t its Chief Economist Andy Haldane state that only recently? – or it is being rather economical with the truth here.

Yet another subsidy for the banks

The announcement of the Term Funding Scheme came like this.

the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate.

At this point you may be thinking is this the Funding for (Mortgage) Lending Scheme or FLS in disguise? That will only be reinforced by this bit.

the TFS provides participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets.

So a £100 billion of subsidy sorry funding to the banks. At that point please indulge me a little as I cut to this morning’s announcement from Royal Bank of Scotland (RBS) .From the BBC

Royal Bank of Scotland reports £2bn loss for the first six months of the year, blaming “legacy issues”

That is the same RBS which was fixed last year and the year before that and the year before that and the year before that…….

Oh by the way how is the culture of subsiding our banks going?

Of course the official version of the TFS is this.

This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

No doubt “should help” will be appearing in future versions of my financial lexicon for these times.

The impact of the fall in the UK Pound £

The trade-weighted index fell by around 1% or to put it another way equivalent to another 0.25% fall in Bank Rate to add to the 2% post Brexit fall that I discussed on Wednesday.

The Bank of England cuts its own income

The last three elements will be financed by the issuance of central bank reserves.

A little known fact is that the Bank of England charges Bank Rate on such issuance such that it got 0.5% until yesterday in what might be called “a nice little earner” by Arthur Daley. In a way it is analogous to seigniorage although there are differences. Now it will be 0.25% and presumably less later in 2016. Mind you that 0.25% will of course be levied on more,more,more.

Open Mouth Operations

The actual moves were added to by a lot of rhetoric about more in fact so much more that they should have been playing MARRS.

pump up the volume
pump up the volume

brothers and sisters
pump up the volume
we’re gonna need you

brothers and sisters
pump up the volume
pump that baby

We were left in no doubt that if necessary the volume will be turned up to 11.


On Wednesday I wrote that I would have voted for no further stimulus on two main grounds. Firstly the fall in the UK Pound £ at that point was broadly equivalent to a 2% reduction in Bank Rate. Secondly I feel that moves which are badged as stimulus have such side effects that the can easily turn out to be both deflationary for demand and inflationary for prices for the economy. That operates through businesses via pension schemes as I have looked at above and for the ordinary person in falls in real wages just like what happened when the Bank of England looked through an inflationary episode in 2010/11.

What we are in effect seeing are put options for the banking sector, house prices and the equity market.

Also if we move to the Bank of England press conference there was one glaring bit as Bank of England Deputy Governor Broadbent told us that they were looking at sentiment measures and downgraded “hard data” such as GDP. This was a complete U-Turn on past policy which has often been to wait for GDP data. Please do not think I am a sort of fan boy for GDP statistics, regular readers will have seen my critiques. But my point is that the Bank of England is now “cherry-picking ” the data to confirm its pre-existing view.

Actually Ben Broadbent seems to be in a state of distress. Here is the BBC’s view of what he said on Radio 4 Today earlier.

Deputy governor Ben Broadbent asked if the ‘s action will have an effect soon, he replies “absolutely, yes”

I have asked them if he has abandoned the long-standing view that interest-rate changes take 18/24 months to have full effect? If I get a reply I will let you know.

Never believe anything until it is officially denied.

Bank of England deputy governor Ben Broadbent says interest rate cut does not send out message of panic (The Independent).

Share Radio

I will be on Share Radio today between 1.10 pm and 1.40 pm covering these matters and the US Employment Report in the latter part. For those not in the UK it is online as well.

Get ready for negative interest-rates in the UK

There is a saying that a week is a long time in politics well it appears that this is also true in monetary policy especially for Martin Weale of the Bank of England. We do not need the TARDIS of Dr.Who to skip back to the 18th of July when he told us this.

This uncertainty points to the argument that we should wait for firmer evidence before making any policy change at least in the absence of any strong arguments for an immediate change.

And indeed this.

For there to be a case for easing policy I will need to expect weakness in output to be large enough to compensate for any overshoot in inflation on the assumption that policy is unchanged in the near term

This led to the view he would not be voting for any Bank Rate cuts a view which was reinforced by those who were reviewing events on the day.

MartinWeale‘s doubts over need for interest rate cut boost markets (Guardian)

Hold fire on interest rates says MPC member MartinWeale ( Daily Telegraph)

MartinWeale on the Bank of England’s policy response to Brexit. Steady as she goes… ( Frances Coppola ).

Such a view would be consistent with the fact that he has twice undertaken a series of votes for a Bank Rate rise ( 12 votes in total I believe) and even briefly rejected the mantra of Forward Guidance of “lower interest-rates for longer”. However of course there is something to be learned about the fact that on each of those three occasions he was found later to be retreating with his tail between his legs.


Here is the conclusion of the article on the interview he has given to Chris Giles of the Financial Times.

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy……..The new stance of Martin Weale, an independent member of the Bank of England’s Monetary Policy Committee.

Well not that independent currently! Top? Only as in spinning like one.But what is the firmer evidence for his change of mind? The emphasis on what is an extraordinary second sentence is mine.

What I said last week is that I would like more information as well as more reflection and I have had more information. Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.

Whether the latter applies in his mind to the way he called for interest-rate rises then reversed such calls I do not know but what changed his mind?

They (Markit Purchasing Managers Indices) are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week,” he told the FT, adding that they were “a lot worse than I had thought” and showed “expectations have worsened sharply”

Okay so a reading of 47.7 ( on a scale which for Greece has gone into the low 30s) is much “worse than I had thought”. Odd when you consider that in some respects it is better than what the Bank of England was saying beforehand. Actually it indicates a possible mild recession if this next bit is true.

much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir

The answer to which is unknown right now but you see as he panics there is a problem. He doesn’t think it will make much difference anyway!

One of the MPC’s problems is that monetary policy works with a delay, so action in August is unlikely to give the economy a quick boost. “If we’re talking about having an effect by the end of the year, there is very little that the bank can do,” Mr Weale said

Actually if you take the traditional view then a Bank Rate cut takes around 18 months to take effect so it will be in full force around New Year 2017/18 about which the PMI survey told us virtually nothing! Indeed he has to face the reality that the Open Mouth Operations of Bank of England policymakers like him have in fact made things worse.

Mr Weale rejected criticisms that the BoE’s warnings about the EU referendum outcome had created a self-fulfilling prophesy of doom.

Even the Financial Times with its long record of toadying to policymakers must have raised that issue which is revealing in itself.

What about QE?

Martin Weale seems rather keen on it.

Asset purchases are still likely to be effective,

Let us take a look at the ten-year Gilt yield which is 0.79%. So any gain from lower bond yields is pretty much used up. Has nobody told Martin? He does say in the interview that he is not keen on “discussing moves in financial markets.” Even if we go to the thirty-year yield it is only 1.67% which is extraordinarily low for the UK. For newer readers I recall days when the long-term Gilt yield was 15%. So any addition would be like tipping a thimble into the river Thames.

A theme song for Martin Weale

I have been receiving suggestions online but let me open with Kylie.

I’m spinning around
Move out of my way…….

Mistakes that I made givin’ me the strength
To really believe

And as suggested here are Dead or Alive

You spin me right round, baby
Right round like a record, baby
Right round round round

August will be Martin’s last vote at the Bank of England and it seems sadly thematic that after a year of votes for higher interest-rates he will panic and vote for a cut. Students at Kings College London may reasonably wonder what the value of his teachings will be?

Negative interest-rates are just around the corner

You might reasonably think that it is always RBS ( Royal Bank of Scotland) and you would be right! From the BBC today.

Natwest and Royal Bank of Scotland (RBS) have warned businesses they may have to charge them to accept deposits due to low interest rates……The move, if enacted, would make them the first UK banks to introduce negative interest rates, in effect, charging to deposit money.

I have to confess that the next bit made me wonder how many of the businesses concerned were still paying high interest-rates on the products that RBS miss-sold to them?

A spokesperson for Royal Bank of Scotland, which owns Natwest, told the BBC the letter was sent to just under 1.3 million of the combined business and commercial customers of the two banks.


There is much to consider here and let me open with an irony. There were, in my opinion enough votes for a Bank Rate cut next week anyway (6-3 I had it). So Dr.Weale has panicked and perhaps made things even more uncertain unnecessarily. He has also sent the UK Pound £ lower which is not what is required right now. He would have done much better to consider if after all the easing that has happened we need ever more that perhaps that is not the answer?! Also we get the second quarter UK GDP numbers tomorrow so if he had waited he would have seen more of the evidence he claims to want as in knowing where we were before the EU Referendum.

Meanwhile the UK looks set to move even closer to and possibly into the world of negative interest-rates. I fear that rather than making things better they will make them worse as so far no-one has negotiated their way out of them. Also there is any irony in a way in it being driven by a vote on the European Union as it is one of its products the Euro which has turned out to be like a supermassive black hole for negative interest-rates.

Mind you Dr.Weale has kindly provided a critique of his and the Bank of England’s independence

I have had no sense of the MPC and the Treasury trying to drag the economy in different directions