Unsecured credit and mortgage lending market will be the winners after the Bank of England move

Today has arrived with an event we have been expecting but the timing was a few days early. Those walking past the Bank of England building in Threadneedle Street early this morning may have got a warning from the opening of Stingray being played on the wi-fi stream.

Stand by for action!

Anything can happen in the next 30 minutes

Before the equity and Gilt markets opened it announced this.

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. …..The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.

So we see that yesterday morning’s equity market falls put the Bank of England into a state of panic. We also see why the UK Pound £ was weak on the foreign exchanges late yesterday as the news seems to have leaked giving some an early wire. The “improvement” announced by Governor Carney of voting the night before should be scrapped. But as we look at the statement the “help to” suggests a lack of conviction and was followed by this.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Okay the first sentence covers a lot of ground. Firstly it implicitly agrees with our theme that banks struggle to reduce interest-rates for ordinary depositors as we approach 0%, we have seen this in places with negative interest-rates. That also means that there is an opportunity to give the banks known under the code phrase “The Precious! The Precious!” at the Bank of England yet another subsidy estimated at the order of £100 billion.

Term Funding Scheme

We have had one of these before as it was initially introduced the last time the Bank of England panicked back in August 2016. It too like its predecessor the Funding for Lending Scheme was badged as being for small and medium-sized businesses but the change of name to the acronym TFSME gives us the clearest clue as to its success. after all successes like Coca-Cola keep the same name whereas leaky nuclear reprocessing plants like Windscale get called Sellafield.

So let me go through the scheme firstly with the Bank of England rhetoric and secondly with what happened last time.

help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;

Mortgage rates fell to record lows providing yet another boost to house prices, building companies and estate agents.

provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;

Unsecured lending went through the roof going on a surge that has continued as can you think of anything else in the economy growing at 6% per annum? You do not need to take my word for it as the Bank of England cake trolley will not be going near whoever wrote this in the latest Money and Credit report.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

Let me now give you the numbers for business borrowing. Now the FLS and the first TFS are now flowing anymore but the numbers are in fact better than hat we sometimes saw when they were.

Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

Oh and in line with the dictum that old soldiers never die they just fade away if you look at the Bank of England balance sheet the Term Funding Scheme still amounts to £107 billion.

Numbers bingo!

We can see this from two perspectives as a rather furious soon to be Governor of the Bank of England Andrew Bailey was given this to announce.

The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Once I had stopped laughing at the ridiculousness of this number I had two main thoughts. Firstly I guess he had to announce something as he had been robbed of rewarding the government with an interest-rate cut later this month. But next remember how we keep being told how we have more secure and indeed “resilient” banks? That seems to have morphed into this.

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020.

So yet another disaster for Forward Guidance! It actively misleads…


After all the Forward Guidance from Bank of England Governor Mark Carney about higher interest-rates he is going to leave them lower ( 0.25%) than when he started ( 0.5%). That about sums up his term in office as those like the Financial Times who called him a “rock star” Governor hope we have shirt memories. Also I have had many debates on social media with supporters of the claims that the Bank of England is politically independent. After an interest-rate cut to record lows on UK Budget Day I suspect they will be very quiet today. After all even Yes Prime Minister did not go quite that far! Indeed the Governor confirmed it in his press conference.

“We have coordinated our moves with the Chancellor in the Budget”

Actually there was also a Dr.Who style vibe going on as we had two Governors at one press conference.

More fundamentally there is the issue that interest-rate cuts at these levels may even make things worse. I am afraid our central planners have little nous and imagination and go for grand public gestures rather than real action. After all if you are short on staff because they are quarantined due to the Corona Virus what use is 0.5% off your borrowing costs? The latter of course assumes the banks pass it on.

As to ammunition left well the present Governor has established the lower bound for them at 0.1% ( hoping we will forget he previously claimed it was 0.5% before cutting below it). Will that survive him? It is hard to say because the real issue here is not you or I ot even business it is “The Precious” who they fear cannot take lower rates. That is the real reason for all the Term Funding Schemes and the like. However Monday did bring a curiosity as the Bank of England bought a Gilt with a yield of -0.025% so maybe it is considering plunging below zero.

Meanwhile there was something else curious today and the PR office of the Bank of England in an unusual turn may be grateful to me for pointing it out, But this was the sort of thing that used to make it cut interest-rates.

Gross domestic product (GDP) showed no growth in January 2020……The economy continued to show no growth overall in the latest three months.

No-one but the most credulous ( Professors of economics and those hoping to or previously having worked at the Bank of England) will believe that was the cause but it is a curious turn of events.

Meanwhile let us look at the term of Mark Carney via some music. Remember when he mentioned Jake Bugg? Well he would hope we would think of today’s move as this.

But that’s what happens
When it’s you who’s standing in the path of a lightning bolt

Whereas most will be humming The Smiths.

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?

What next for the Bank of England?

Today is what used to be called Super Thursday for the Bank of England. It was one of the “improvements” of the current Governor Mark Carney which have turned out to be anything but. However he is not finished yet.

Starting on 7 November, the Bank of England Inflation Report is to become the Monetary Policy Report. The Report is also to undergo some changes to its structure and content.

These changes are part of the Bank’s ongoing efforts to improve its communications and ensure that those outside the institution have the information they need in order to understand our policy decisions and to hold us to account.

Really why is this?

The very latest changes represent the next step in the evolution of our communications.

I suppose when you tell people you are going to raise interest-rates and then end up cutting them you communication does need to evolve!

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

The London Whale

There was so news this morning to attract the attention of a hedge fund which holds some £435 billion of UK Gilt securities as well as a clear implication for its £10 billion of Corporate Bonds. From the Financial Times.

Pimco, one of the world’s largest bond investors, is giving UK government debt a wide berth, reflecting concerns that a post-election borrowing binge promised by all the major political parties could add to pressure on prices. Andrew Balls, Pimco’s chief investment officer for global fixed income, said the measly yields on offer from gilts already makes them one of Pimco’s “least favourite” markets. The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive, he said, forecasting that the cost of UK government borrowing would rise.

Yes Andrew Balls is the brother of Ed and he went further.

“Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight,” he told the Financial Times.

Actually pretty much every bond market looks like that at the moment. Also as I pointed out only yesterday bond markets have retraced a bit recently.

The cost of financing UK government debt has been rising over the past month. The 10-year gilt yield has reached 0.76 per cent, from 0.42 per cent in early October. That remains unattractive compared with the 1.84 per cent yield available on the equivalent US government bond, according to Mr Balls,

Mind you there is a double-play here which goes as follows. If you were a large holder of Gilts you might be pleased that Pimco are bearish because before one of the biggest rallies of all time they told us this.

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a ‘must avoid’, with its gilts resting ‘on a bed of nitroglycerine.’ ( CityWire in 2010 ).

Also there is the fact that the biggest driver of UK Gilt yields is the Bank of England itself with prospects of future buying eclipsing even the impact of its current large holding.

House Prices

As the Bank of England under Mark Carney is the very model of a modern central banker a chill will have run down its spine this morning.

Average house prices continued to slow in October, with a modest rise of 0.9% over the past year. While
this is the lowest growth seen in 2019, it again extends the largely flat trend which has taken hold over
recent months ( Halifax)

Indeed I suggest that whoever has to tell Governor Carney this at the morning meeting has made sure his espresso is double-strength.

On a monthly basis, house prices fell by 0.1%

This is the new reformed Halifax price index as it was ploughing rather a lonely furrow before. We of course think that this is good news as it gives us another signal that wages are gaining ground relative to house prices whereas the Bank of England has a view similar to that of Donald Trump.

Stock Markets (all three) hit another ALL TIME & HISTORIC HIGH yesterday! You are sooo lucky to have me as your President (just kidding!). Spend your money well!

The Economy

This is an awkward one for the Bank of England as we are on the road to a General Election and the economy is only growing slowly. Indeed according to the Markit PMI business survey may not be growing at all.

The October reading is historically consistent with GDP
declining at a quarterly rate of 0.1%, similar to the pace
of contraction in GDP signalled by the surveys in the third

Although even Markit have had to face up to the fact that they have been missing the target in recent times.

While official data may indicate more robust growth
in the third quarter, the PMI warns that some of this could
merely reflect a pay-back from a steeper decline than
signalled by the surveys in the second quarter, and that the
underlying business trend remains one of stagnation at

The actual data we have will be updated on Monday but for now we have this.

Rolling three-month growth was 0.3% in August 2019.

So we have some growth or did until August.

The international environment is far from inspiring as this just released by the European Commission highlights.

Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

The idea that they can forecast to 0.1% is of course laughable so it is the direction of travel that is the main message here.


If we move on from the shuffling of deckchairs at the Bank of England we see that its Forward Guidance remains a mess. From the September Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

Does anybody actually believe they will raise interest-rates? If we move to investors so from talk to action we see that in spite of the recent fall in the Gilt market the five-year yield is 0.53% so it continues to suggest a cut not a rise.

More specifically there was a road to a Bank of England rate cut today as this from the 28th of September from Michael Saunders highlights and the emphasis is minr.

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

He was an and maybe the only advocate for higher interest-rates so now is a categorised as a flip-flopper. But it suggested a turn in the view of the Bank in general such that this was suggested yesterday by @CNBCJou.

Looking forward to the BOE tomorrow where the new MONETARY POLICY REPORT will be presented (not to be confused with the now defunct INFLATION REPORT). A giant leap for central banking. * pro tip: watch out for dovish dissenters (Saunders, Vlieghe?) $GBP

The election is of course what has stymied the road to a return to the emergency Bank Rate of 0.5% as we wait to see how the Bank of England twists and turns today. Dire Straits anyone

I’m a twisting fool
Just twisting, yeah, twisting
Twisting by the pool

The Investing Channel



Bank of England Forward Guidance keeps flip-flopping

One of the long-running themes of my work is that central bankers run in a pack or if you are feeling harsh have a job-share on the same brain cell. In my interview with RethinkingTheDollar.com earlier this week I described them as being like Stepford Wives. So you can imagine I was expecting to hear from the Bank of England which has been pretty quiet through a phase where we have seen interest-rate cuts from the US Federal Reserve and the European Central Bank of ECB amongst others. Indeed according to the Wall Street Journal the Bank of Japan is on the case as well.

Bank of Japan Gov. Haruhiko Kuroda said Tuesday cutting short-term interest rates would be effective in buoying the economy, confirming that the option remains on the table despite a backlash from the financial sector.

So enter Michael Saunders of the Bank of England who is giving a speech in Barnsley and he set out his stall early.

With persistently high Brexit uncertainties and softer global growth, the UK economy has weakened markedly in recent quarters, opening up a modest amount of spare capacity.

Although it is only one sentence there are already two problems with this. The first is that the Brexit uncertainty strengthened the UK economy in the first quarter with GDP growth of 0.5%. Also we can see that he is back to the Ivory Tower view of events where “spare capacity” is based on the output gap. As a reminder the following sequence of events would be comical if they were not so serious. But we were guided towards an unemployment rate of 7% then to “equilibrium” unemployment rates of 6.5%, 6%,5,5%, 4.5% and well you have the idea. In essence and this is another theme their so-called theory in fact simply chases reality after a delay.

Next we get a bit of a standard Bank of England statement.

The economy could follow very different paths depending on Brexit developments. But in my view,
even assuming that the UK avoids a no-deal Brexit, persistently high Brexit uncertainties seem likely
to continue to depress UK growth below potential for some time, especially if global growth remains disappointing.

Here he seems to be mixing two concepts as he meshes the Brexit issue with the global situation. Sadly he is ploughing on with the output gap theory and I am sorry to say he is embarrasing himself as the tweet below from Nicola Duke shows.

When BoE Saunders voted hikes in 2017: Wages 2.3%  CPI 3.1%  GDP 1.7%  Unemployment 4.7%


Today he wants cuts: Wages 3.9%  CPI 1.7%  GDP 1.8% Unemployment 3.8%


These people are paid to do this. I’m not an economist but my common sense tells me they don’t do a very good at their job.

As you can see the idea of using the labour market as a signal for an Ivory Tower style output gap falls flat on its face here. Wage growth is now much better and the unemployment rate is a fair bit lower.

So what is the prescription from Dr Saunders? The emphasis is mine

In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be
appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further. Of course, the monetary policy response to Brexit developments will also take into account other factors
including, in particular, changes in the exchange rate and fiscal policy.

Forward Guidance

Let me now link all this to the title of my piece today and look at the latest version of Bank of England Forward Guidance from last week’s Minutes.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

That didn’t last long did it? If we consider the theory it is yet another disaster for the output gap theory of the Bank of England’s Ivory Tower as the “significant margin of excess demand” lasted for all of one week!

As for Micheal I am afraid it is even worse because as recently as the 10th of June he was telling us this. The emphasis is mine

To sum up, in my view, the output gap is probably closed and, assuming a smooth Brexit (as well as the
asset prices prevailing at the time of the May Inflation Report), risks to consumer spending probably lie to the
upside of the latest IR forecast. This would push the economy even further into excess demand than the
central projection in the latest IR, with the jobless rate likely to reach new lows. In turn, this would be likely to
reinforce upward pressure on domestic cost growth and inflation over the next 2-3 years. In this case, Bank
Rate will probably need to rise further over the forecast period than implied by the market path used in the May Inflation Report to keep inflation on target over time.

Indeed he claimed he was keen to get on with it.

But there would be costs if we delay tightening until all the potential warning signs across pay, capacity and prices are flashing red. Such an approach would make it less likely
that tightening would be limited and gradual, and more likely that the economy would face a painful

What has caused this?

Reading the speech Michael Saunders has been reading the economic surveys but seems not to have read then all as this bit illustrates.

In particular, economic growth has
slowed much more here than in the US and EA, even though the rise in global trade tensions has not led to
any actual or threatened hikes in tariffs on UK exports.

Now let me remind you of Tuesday’s Markit PMI report for the Euro area.

The survey data indicate that GDP looks set to rise
by just 0.1% in the third quarter, with momentum
weakening as the quarter closed.

The actual data for the UK is that GDP grew by 0.3% in July which wiped out the drop in the second quarter so as it stands “slowed much more here” seems rather odd.

Next we find that he is absolutely committed to his output gap theory until it does not suit.

As a result, capacity pressures are no longer increasing and may be starting to ease. To be sure, the jobless rate (3.8%) remains slightly below the MPC’s estimate of equilibrium (4¼%). But taken as a whole, business surveys suggest that capacity use in firms has fallen below average.

Oh hang on it’s now back.

In my view, the economy now (end of Q3) probably has an output gap of perhaps ⅓% or ½% of GDP or so.


A lot of this is very damning for both the Bank of England and Micheal Saunders who seems determined to live up to the unreliable boyfriend moniker applied to his boss Mark Carney. But there are other issues here and is starts well as at times like these there is much to welcome about some honesty.

For a monetary policymaker, an extra complexity is that it may well be unclear for some time which scenario
is likely to unfold.

But then look where it takes him.

However, this is not necessarily a recipe for policy inertia.

He seems to want to splash around in the dark.

I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track, and accepting that it may be necessary to change course if the outlook changes

Also we have learned to be very afraid of statements like this.

BoE’s Saunders says he is not a fan of negative interest rates, adding that the floor for UK interest rates is close to zero, marginally positive ( @DailyFXTeam )

This is because such statements are PR in case he does vote for native interest-rates he can present it as something he did not want. So why does he feel the need to point that out?

Just for clarity “the floor for UK interest-rates” is considered by the Bank of England to be 0.1%. This replaced the 0.5% that Governor Carney kept telling us about round about the time he cut to 0.25%. Will Britney be on the Bank of England loudspeakers?

Oops, I did it again
I played with your heart
Got lost in the game

Even worse is the possibility that Michael Saunders is simply chasing the markets because as regular readers will be aware UK Gilt yields have been predicting an interest-rate cut for some time.

Number Crunching.

Here is a reply I sent to Bloomberg in response to their social media reports on the UK Pound £

In a week where use of language is being challenged how about “woes have multiplied” for a fall of all of 0.3% as I type this?





What are the prospects for UK mortgage rates?

Today I thought I would reverse things around and look at a consequence of one of 2019’s themes. So let me hand you over to Moneyfacts.

The data shows that the largest rate reduction has been recorded in the five year maximum 80% loan-to-value (LTV) tier, which has fallen by 0.09% to 2.78%, followed by the five year maximum 70% and 85% LTV tiers, which have both decreased by 0.07% to 2.99% and 2.80% respectively. In fact, the only LTV tier to see a rate increase is the two year fixed at a maximum 65% LTV, which has increased by 0.01% to 2.03% from this time last month.

Oh and remember all the rhetoric from politicians after the credit crunch about there being no future for risky mortgage lending?

Since the beginning of this year, our analysis shows that the strongest rate competition appeared to take place at the maximum 95% LTV market, with lenders attempting to attract potential first-time buyers, which are considered the lifeblood of the mortgage and property market. As a result, the two year average fixed rate at this tier was driven down from 3.46% on 1 January to 3.24% by 16 May, where this rate has relatively remained unchanged since.

However those are averages which of course contain more than a few non-competitive offers. If we look further you can borrow at 1.33% from the Post Office for 2 years and at 1,67% from it for five years. These are remortgage rates with 40% equity.

Switching now to the driver of all this let me now point out that the two-year Gilt yield is 0.37% and the five-year is 0.3%. There are two perspectives on this of which the opening one is that the five-year fixed looks a worse deal in a relative comparison. However if we look back we see that it is five-year mortgage rates which have plunged. According to Statista the five-year mortgage rate was some 2% higher in June 2014 ( 3.69%) and apart from a small blip up when Bank Rate was raised to 0.75% has essentially been falling ever since. So five-year fixed rate mortgages are tactically bad but strategically good.

Just for clarity it is not the Gilt yields themselves that directly impact fixed-rate mortgages it is the swap rates that they influence. But with things as they are I expect the downwards pressure to remain.

What about a Bank Rate cut?

I am sure many of you thinking this so let me address it. As we stand UK Gilt yields are expecting two Bank Rate cuts of 0.25% so fixed-rate mortgages are already adjusting to that. Whereas in such a scenario variable-rate mortgages would fall and may well over the next couple of years be a better deal. Of course interest-rates could rise after October 31st should we Brexit on that date but we know that Bank of England Governor Carney cuts interest-rates with the speed of Usain Bolt but raises them at the speed of a tortoise which is hibernating. So only a real calamity would cause the latter. After all this is the world in which we now live.

Danish banks now buckling under the pressure of negative interest rates, with another lender announcing it will impose fees on large retail deposits. ( h/t Tracy Alloway)

Or indeed a world where the benchmark yield in Italy fell below 1% yesterday.

Just for clarity these are my opinions and not advice. Also there is the issue raised by Robert Pearson in the comments section about the banks having higher cost of funds limiting possible mortgage-rate falls.

The Outer Limits

Time for a reminder of something which has ignored the falls in Bank Rate and everything else. The Bank of England quoted interest-rate for credit cards is 20% and has risen in the credit crunch era.

What about the Mortgage Market?

We had figures earlier this week but today the Bank of England offered a wider view.

Net mortgage borrowing by households picked up in July, rising to £4.6 billion. While this was the strongest since March 2016, it reflected a fall in repayments rather than an increase in new lending. The annual growth rate remained at 3.2%, close to the level seen since 2016. Mortgage approvals for house purchase (an indicator for future lending) increased in July to 67,300. This was the strongest since July 2017, but remains within the very narrow range seen over the past two years.

The fall in repayments is curious and amounted to £900 million on a monthly basis and repeats what happened in June. It is dangerous to extrapolate too much from a couple of months but maybe some borrowing is going through this route or at current interest-rates some think it is not worth repaying.

Overall these are better numbers but not as strong as the UK Finance ones from Wednesday.

House Prices

In spite of the favourable situation provided by falling mortgage rates as we have just looked at and improving real wages house prices are not responding. From the Nationwide.

Annual house price growth remained below 1% for the ninth
month in a row in August, at 0.6%. While house price
growth has remained fairly stable, there have been mixed
signals from the property market in recent months.

In fact the unadjusted price fell by around £1600 on a monthly basis.

Unsecured Credit

The Bank of England slips this headline in for the copy and pasters.

Net consumer credit rose by £0.9 billion in July, broadly in line with the average seen over the past year.

But this represents this.

The annual growth rate of consumer credit remained at 5.5% in July, markedly lower than its peak of 10.9% in November 2016. This slowing reflects the weaker monthly lending flows over most of the past year.

Is there anything else growing at an annual rate of 5.5% in the UK? Perhaps the Bank of England is being wistful for the days when its Sledgehammer QE drove the annual rate of growth up to 10.9%. Also care is needed here about the slowing as much of it may simply reflect a slowing in car loans about which the Bank of England mostly keeps the data to itself ( I have asked).

Broad Money

If we look further ahead ( around 18 months) there was a glimmer of sunlight for the wider economy this morning.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFC’s) and financial corporations that do not act to intermediate financial transactions (NIOFCs). In July, total money holdings rose by £18.9 billion, the largest monthly increase since May 2018. The increase on the month was driven by PNFCs, for which money held rose to £5.1 billion following a fall in June

The annual rate of growth is now 3.1% which is the best it has been since this time last year. M4 lending has also been picking up and is now 4.3% so there are some positive signs albeit from low levels.


We live in a curious world because let me add in another factor. The mortgage rates and yields we are discussing today are all strongly negative in real terms when we allow for inflation. Not only are Gilt real yields negative bit the ordinary person can borrow at negative real rates too if they have some equity. Not on a credit card though!

On current trends we may well get very low longer-term fixed-rate mortgages as presumably the ten-year fixed mortgage-rate will start to tumble too. In the uncertainty we face that could look very attractive I think. But again that is simply my opinion and not advice.

As for how low can they go? For the moment a base seems to have formed around the unwillingness/fear of banks on countries with negative interest-rates to actually impose this on the ordinary depositor. But we also know that our central planning overlords have several cunning plans in mind for this.


To Infinity! And Beyond! The Bank of England and QE

It is nice to be proven correct and the business of Bank of England Governor Carney applying for the role of managing director of the IMF is something I suggested years ago. But today I wish to stay with the Bank of England and look at the future of its biggest monetary policy experiment which is what has become called QE or Quantitative Easing where it expands its balance sheet. So let us open with a how much?

Three quarters of the Bank’s assets is in the form of a loan to the Asset Purchase Facility backing £435bn of
gilt holdings and £10bn of corporate bonds, while another £127bn has been lent to banks under the
Term Funding Scheme . A further £13bn of liquidity has been extended under the so-called ‘Index Linked Term Repo’ facility, part of the Sterling Monetary Framework (SMF).

That gives us a total of £585 billion although some care is needed because you see the Term Funding Scheme is in but the preceding Funding for Lending Scheme which as of the last update still accounts for £10 billion is not. So whilst we have precision as so often care is needed with the definition as similar policies in terms of effect ( in this instance promising to boost business lending but somehow boosting mortgage lending instead) can be treated very differently. On that road the Term Funding Scheme managed to be added to the national debt which might have mattered a lot but due to circumstances ( bond market boom) has been much less of an issue than it might have been. Another way of looking at it is below.

Before the financial crisis, our balance sheet was modest, at 4% of GDP. Since then, and in direct response to the
crisis, that figure has risen to around 30%: a more than seven-fold increase.

These figures are from a speech given by Andrew Hauser who is an Executive Director at the Bank of England and he churns out something which could have been spoken by Sir Humphrey in Yes Prime Minister.

‘Too large’, and central banks may find themselves accused of usurping the role of financial markets,
harming innovation and inducing imprudent behaviour; fuzzying the boundary between monetary and fiscal
policy, providing a ‘dangerous temptation for … the political class’ ; or giving unmerited financial rewards to
reserves holders.

Actually this is what they have done and for those of you wondering about the last bit let me explain. One of the features of the QE era is that as the balance sheet has to balance there needed to be reserves on the other side of it and they get Bank Rate. When central bankers talk about there being market pressure for lower interest-rates this is what they mean.

The excess of reserves pushes down on overnight markets rates, but they are prevented from falling much below a floor of Bank Rate by the fact that banks can borrow reserves in the market and earn Bank Rate by depositing them at the Bank of England.

You may note that this is also a response to central bank policy something which they forget. Also let me address this bit.

And rates have indeed been closer to Bank Rate on average than at any point in the past twenty years.

This is both true and misleading. In the money markets this is a success as for example the US Federal Reserve has had its troubles with this ( if you see the acronym IOER that is what they are referring to). But outside that in the real economy it is misleading as so many have diverged from Bank Rate. You do not need to take my word for it as the existence of QE proves it. Putting it another way I pointed this out around 9 years ago when I started blogging and it is still true.

Returning to Bank Rate as being a reward that seems odd as it is a mere 0.75% so let me give you a couple of perspectives. It is compared to the ECB Deposit Rate of -0.4%. But if we stay with the UK you might say dip into a short-term Gilt but the one-year yields 0.59% and the two-year 0.53% so compared to them Bank Rate is a reward.

How will we engage reverse gear?

We get a statement of the obvious.

Just as QE increased the quantity of central bank reserves, QT will reduce it.

For newer readers QT stands for Quantitative Tightening and means this.

But at some point, as part of a future tightening strategy, the time will come to start reducing the stock of
purchased assets.

Okay how will this happen?

First, the MPC does not intend to begin QT until Bank Rate has risen to a level from which it could be cut materially if required. The MPC currently judges that to be around 1.5%.

There is a problem with the “currently judges” as a note to the speech points out.

This judgment was adjusted down from around 2% in June 2018, reflecting revised estimates of the effective lower bound for Bank Rate.

That is revealing in many ways and evokes memories of the way that the so-called equilibrium unemployment rate found its way from 7% to 4.25%. After all when you move things that much you lose pretty much all credibility. The issue of the effective lower bound was created because Governor Carney pointed out several times that he thought it was 0.5%. So he effectively torpedoed his own logic when he cut to 0.25%. Amidst the embarrassment, the Bank’s Ivory Tower suddenly decided that the lower bound for Bank Rate was 0.1% using the Term Funding Scheme as its sword.

Second, QT will be conducted over a number of years at a gradual and predictable pace, chosen by the MPC in light of economic and financial market conditions at the time.

That is ominous as it echoes the language of the talk about interest-rate increases as we have had Forward Guidance for at least five years now but net only one increase of 0.25%! Actually in the current environment even that may go later this year but that is not for today.

Third, the QT path will take account of the need to maintain the orderly functioning of the gilt and corporate bond markets including through liaison with the Debt Management Office.

Who could possibly have thought that buying some £435 billion of something would fundamentally change the Gilt market? Actually more trouble may come with the corporate bond market because it was not especially liquid anyway and being a (relatively) large seller will not be easy.

And, fourth, the QT path can be amended or reversed as required to achieve the inflation target.

So the QT path might involve more QE. It is hard not to laugh but once our mirth fades that is of course the road that the US Federal Reserve may now be on.


Let me address my “To Infinity! And Beyond!” point. At the current rate of progress Bank Rate will reach 1.5% around 2033. Should the Bank of England then decide it was right about 2% then we move onto around 2043. You get the idea which is rather like what has happened with the maturity of Greek debt which is always kicked further into the distance. The situation regarding timing gets worse should we see further cuts in interest-rates which right now are a lot more likely than rises. 2050s? 2060s?

In a way Mr. Hauser addresses this in his speech but he misses a crucial point.

When might this all start? No time soon, if you ask the financial markets! The current forward yield curve
does not reach 1.5% at all . But options markets price in a small probability of it occurring, and (as
the chart shows) expectations can shift quite rapidly: less than a year ago the implied central case start date
was in 2021.

Interest-rate expectations have shifted downwards time and time again in the credit crunch era and been matched by events. However expectations of interest-rate rise have not be matched by reality, otherwise the ECB and Federal Reserve would be raising later this month rather than either cutting or laying the groundwork for one.

Next let me address options markets as you see I used to be an options market-maker. Why would you price it at zero? Someone might want to buy so you make them pay for it. That is completely different to believing it might happen.

I have long believed that the Bank of England has no intention of reversing QE and this is also confirmed by the speech itself. After all with respect to Mr.Hauser if something was going to be done this would be a subject for the Governor not a mere executive director.

The Investing Channel



HM Treasury has mounted a successful takeover of the Bank of England

We have an opportunity to find out what policymakers at the Bank of England are thinking today especially as the speech I am about to analyse keys with the latest economic news. Sir David Ramsden who prefers to be called Dave has given a speech in Inverness, so let us give him some credit for venturing forth from London. However before we get to the economics there is a systemic problem highlighted by it and him so let’s get straight to it.

when I became Chief Economic Adviser at
the Treasury in 2007.

Let me add to that with this from the Bank of England website.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017. He was responsible for advising on UK macroeconomic policy and was the Government’s representative of the meetings of the Bank’s Monetary Policy Committee. Previous to that he held a number of civil service roles including leading the Treasury work advising on whether the UK should join the Euro.

Now let me remind us all that the changes in 1997 were supposed to make the Bank of England independent, and what that meant was independent of Her Majesty’s Treasury. As you can see Dave is steeped in it. This is common amongst the Deputy-Governor’s as both Ben Broadbent, Jon Cunliffe and Sam Woods are also alumni of HM Treasury. As you can see independence was a temporary feature which HM Treasury saw as a challenge. This is a big deal when we look at policies like QE which is presented as one body (treasury) being different from the other (central bank ) whereas it is really smoke and mirrors.

The economy


Here is an area where I broadly agree.

Much of the apparent growth in finance sector productivity before the crisis reflected profits on the risky lending that led to the crisis itself. Indeed the way finance sector output is measured meant that the rate of bank balance sheet expansion translated directly into the measured
contribution of the finance sector to productivity growth.

It is rare to see any sort of even implied criticism for “The Precious” so we should welcome this. Also you may note there is also implied criticism of the concept.

The UK manufacturing sector is now much
more productive as a result – but is also smaller.

I do not know if he thinks of it like this but if the sector which is most likely to be productive is getting smaller and being replaced by services there is a clear issue.

Moving to policy we get a clue from this view from Dave who says he expects a lower level of productivity growth than this..

This judgement is embedded in
our Inflation Report forecasts, where we now assume productivity growth of around 1%.

This means that he has a downbeat view on prospects for the UK economy.

Since productivity growth is a key determinant of how fast the economy can sustainably grow –
what I just described as the economy’s “speed limit” – that also means that, all else equal, I am a little more
pessimistic about future GDP growth.


There is a two-way swing here where we get plenty of excuses but the reality is or rather was this.

And GDP turned out to be robust: it has grown by around 1% more than we predicted in August
2016, immediately after the referendum.

However Dave when looking ahead seems to be concentrating on a familiar area, can you spot it?

We have evaluated what effect of a worst case
disorderly scenario, featuring much lower GDP, higher inflation and unemployment and much lower house
prices, would be on the core banking system,

However his view on the problems of unexpected events did get some support from this morning’s release from the UK motor industry or SMMT.

British car manufacturing output plummeted by almost half in April, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT).

70,971 cars rolled off production lines in the month, down -44.5% year on year as factory shutdowns, rescheduled to mitigate against the expected uncertainty of a 29 March Brexit, took effect in many plants across the UK.

That frankly was a shambles after so many promises that March 29th would be the day and yet it went past like any other. the catch of course was that planning was wrong-footed. Some of it will be caught up as we pass the dates where there would have been shut downs anyway but the central issue of a possible exit date remains. This was a clear fail for the UK government.

Labour Market

This has been a very difficult area for the Bank of England as anybody who recalls the original version of Forward Guidance which guided us towards an unemployment rate of 7% being significant for interest-rate increases. How did that go?

Employment growth has remained historically strong, with unemployment falling to 3.8%.

So really rather well for the unemployed and the economy overall. As to increases in interest-rates, not so much, as we in fact started with a cut and have managed in net terms one increase to 0.75%. The claims by Governor Carney that this has not been a debt fuelled boom seem somewhat at odds with this from Deputy-Governor Ramsden.

Consumption has instead been funded, perhaps less
sustainably, by a historically low household saving ratio.

He can’t quite bring himself to say debt can he? Perhaps though he is still chastened by the response to his claim that unsecured credit growth was weak when it was growing at an annual rate of 8.3%.

Also if we reflect on where the speech was given then according to the criteria originally set out for Forward Guidance Scotland should now have interest-rates considerably higher than they are.

And unemployment is at 3.2%, even lower than the already record-breaking UK rate of 3.8%. In the Highland
region it was 3.0% in the most recent data.

Put that in your output gap and smoke it. The Ivory Towers have shown what we might call remarkable intellectual flexibility here. After all the Bank of England has been telling us spare capacity has been “broadly used up” for about five years now.

There was some more welcome news this morning. From the BBC.

The number of low-paid workers dropped by 200,000 last year, with 120,000 of them aged between 21 and 30, the Resolution Foundation said.

It said the introduction of the National Living Wage had “significantly” reduced low pay.


There are several issues here. Let me start with the Treasury one which matters because pretty much everyone I have met from there suffers from being part of what I can only describe as a hive mind. Moving onto interest-rates we see some curious contradictory statements from Deputy-Governor Ramsden. First he is in the raising crew.

Demand,in terms of GDP growth, has exceeded growth in supply such that spare capacity in the economy has been,
broadly speaking, used up. Reflecting that, and its implications for domestic inflationary pressure, the MPC
has raised Bank Rate twice; it now stands at 0.75%.

The cut seems to have been redacted but anyway suddenly we might go in either direction.

There are scenarios where the balance of those factors
would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to
tighten. In other words the response would not be automatic and could go either way: rates could go up or
down as the situation demands.

The one scenario we do not get is talk outright of a cut which is odd because if you look at the thinking on the speech that looks the most likely outcome.

Me on The Investing Channel

Of the next Bank of England Governor, Bank Rate cuts and Metro Bank

It is time for us to peer again through the clouds and remind ourselves of the mindset of a central banker. In this instance it is the current favourite to be the next Governor of the Bank of England Andrew Bailey who has been working hard to establish his credentials for the role.

A whistleblower has heavily criticised the head of the Financial Conduct Authority for failing to investigate her complaints against Lloyds Banking Group, despite his assurances about the seriousness of the case. Sally Masterton wrote last June to FCA chief executive Andrew Bailey — the bookies’ favourite in the race to succeed Mark Carney as Bank of England governor — to protest about her treatment by Lloyds. ( Financial Times)

Indeed if the writing below is accurate he seemed keen to keep the matter quiet.

Mr Bailey took a personal interest in Ms Masterton’s case, encouraging Lloyds to settle with her financially. But he did not act on the serious criticisms she made about the conduct of the bank and its senior managers towards her, according to emails seen by the Financial Times. These concerned alleged breaches of the FCA’s rules.

This all seems to be something that Mr Hollinrake,  the co-chair of the all-party parliamentary group on fair business banking, either does not understand or is willfully misrepresenting.

“Anyone under consideration for the role of Bank of England governor must be able to demonstrate a willingness to tackle wrongdoing in the banking sector without fear or favour,” added Mr Hollinrake.

After all Mr.Bailey does not seem that keen on whistleblowers.

Last year the regulator was attacked for its decision to only impose a fine on Barclays chief executive Jes Staley after he employed private investigators to try to unmask a whistleblower. The FCA was also criticised last year for revealing the identity of a whistleblower to Royal Bank of Scotland.

In case you are thinking this is something new here is Sir Frank from Yes Prime Minster in the early 1980s.

We believe that it is about time the Bank of England had a Governor who is known to be both intelligent and competent. Although an innovation, it should certainly be tried.

The Treasury has endured these City scandals long enough.

Plus ca change c’est la meme chose.

Central Banker Thinking

A research paper on the Bank Underground site is rather more revealing than it intends so let us start with the subject matter.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009.

If this worked then we would not have needed the subsequent QE ( Quantitative Easing) and credit easing, nor would we have remained at the consequent Bank Rate of 0.5% for so long. But according to this research it was something of a triumph.

Although UK unemployment rose by around 3pp in the year following the collapse of Lehman Brothers, the extraordinary monetary stimulus carried out by the MPC surely protected the aggregate economy from a fate far worse………But even for the least affected regions, I estimate that employment growth was around 1.4pp higher than it otherwise would have been solely through this channel  ( pp = percentage points).

There is a catch here as there is an obvious moral hazard in an institution being both judge and jury on its own policy. But having noted that there is something revealing in the the area that leads to this result. It is of course the housing market and combines the banks too!

Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others.

So we have a confession about exacerbating inequality which I guess they hope we will not spot and it leads to this.

Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009.

As far as I can see there is no mention of the impact of cheaper borrowing for businesses and I would remind newer readers that at the time this was often badged as boosting inflation as well. It is easy to forget that the Bank of England went into something of a panic as the Retail Price Index went negative and feared the CPI would do the same. The irony here is that the RPI was driven into negative territory by the large falls in mortgage rates as it has them in it ( currently at a 2.4% weighting but logically it would have been higher then).

Here is the more detailed prescription of what happened.

Some mortgagors received a cash-flow boost as their monthly mortgage repayments fell in lock-step with policy rates as the nights closed in at the end of 2008 . Many chose to go out and spend part of this windfall, on goods made (and services provided) both at the national and local levels. And, as people finally got round to fixing their cars, made more trips to their nearby corner shop and splurged on meals out, we might expect this spending on locally-provided services to have supported local employment in the face of the Great Recession.

This can be broken down at the individual level.

Those who went into the autumn of 2008 with a mortgage linked to Bank Rate (on a so-called variable-rate mortgage) received an average favourable cash-flow shock equivalent to around 5% of their annual pre-tax income the following year:

Also on a more collective level.

My results suggest that a 1 percentage point accommodative monetary policy change led to around a 3.5pp increase in annual employment growth of businesses that relied on local custom between 2009 and 2010. These businesses made up around a fifth of overall employment.



There is a lot to get though here so let us crack on.This is a sensible reflection by the author Fergus Cumming.

This point estimate should be treated with caution and monetary policy operates through a number of channels that work over different horizons.

But this is not.

There are also good reasons to think that the cash-flow effects I find would likely have been approximately symmetric if interest rates had instead increased.

Can you imagine the impact of a 4% Bank Rate rise at that time? Personally I would rather not.

Next we can see that 2008 came as a genuine shock or if you prefer the forerunners to Forward Guidance had a nightmare.

Survey evidence shows that only 10% of households in August 2008 expected policy rates to fall substantially in the coming months.

However you try to spin it there is a problem for future monetary policy easing from this channel.

After a sustained period of mortgage rates close to zero, more than 90% of new mortgages are now fixed-rate contracts and so the average time-to-refinance on the stock of mortgages is increasing over time. Although the effects I estimate are likely to be approximately symmetric, the evolution of the composition of mortgages means that the direct pass-through of changes in Bank Rate to household finances is likely to be slower in the future.

No wonder they are so keen to discuss anything other than monetary policy these days.

Metro Bank

My subject of Wednesday has been in the news today. It has raised an extra £375 million of capital which is welcome but more worryingly it has received the equivalent of the board of directors expressing confidence in their manager after a bad run of results. From the Bank of England website.

The Prudential Regulation Authority welcomes the steps taken today by Metro Bank. Metro Bank is profitable and continues to have adequate capital and liquidity to serve its current customer base. It has raised additional capital in order to fund future growth.

They need to follow the advice of Tears for Fears.

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