The Bank of England wants to control UK house prices?

Today has given us an opportunity to bring together several of our ongoing theme at once. Let me open with news that will be announced to smiles at the Bank of England morning meeting.

“Average houses prices rose again in December, stretching the current run of continuous gains to six months.
However, the monthly rise of 0.2% was the lowest seen during this period and significantly down on the 1.0% increase in November. The average house price was therefore little changed, but nonetheless still reached a fresh record of £253,374.” ( Halifax)

The smiles will have then turned to cheers and only Covid-19 social distancing will have stopped a round of high fives.

“All this left average prices sitting some 6.0% higher at the end of 2020 when compared to December 2019, a notably
strong performance given the anticipated impact of the pandemic earlier in the year. Whilst the annual rate of inflation did fall compared to November (+7.6%) to stand at its lowest level since August, it should be noted that this also
reflects a particularly strong period for house prices towards the end of 2019 as political uncertainty at that time began to ease”

With the rather parlous state of the economy this is really rather extraordinary but seen through the eyes of our central bankers this is quite a triumph. In their circle the numbers from Italy ( 1% annual house prices growth) we looked at yesterday will be seen as a disaster. Indeed PhD’s will be instructed to explain how the Bank of England monetary easing in March boosted the change in 2020 observed below.

“2020 was a tale of two distinct halves for the housing market. Following a strong start, the first half was dominated by the restrictions on movement due to COVID-19, and prices were subsequently down 0.5% at mid-year as the market effectively ground to a halt. However, when the market reopened, prices soared as a result of pent-up demand, a desire amongst buyers for greater space and the time-limited incentive of the stamp duty holiday.”

Indeed some started early back in June and if you want your research sponsored by the Bank of England this this the way to do it.

The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled

So confident are they after displaying such a number that they are willing to countenance a central banking heresy.

Recent commentary on this blog and elsewhere argues that this unprecedented rise in house prices can be explained by one factor: lower interest rates. But this simple explanation might be too simple.

But just as the Governor’s temper is tested they save the day by pointing out the contribution of other monetary policy measures.

Mortgage debt expanded rapidly as house prices rose in the UK before the crisis, so this could be an important channel for the UK.

This fits neatly with the £128 billion of the Term Funding Scheme which has pumped up the quantity of mortgage debt banks can offer without any need to attract any of those pesky depositors and savers. There is an irony here as, of course,  the money supply numbers I looked at on Monday show there has been a surge in deposits as savings have soared post the Covid-19 pandemic.

Central Control

I now wish to switch to a rather revealing speech by Andrew Hauser of the Bank of England yesterday. He opens by describing a scene which for a modern central banker sends a chill down the spine.

Increasingly we look to financial markets, rather than banks, to care for our savings or provide credit.
Millions save via pension, investment or exchange traded instruments……… And firms, large and small, borrow from capital markets or non-bank lenders.
Taken together, fully half of all financial assets are now held outside the banking system.

I guess we are reminding ourselves that a central bank has bank in its name. Because when you look at the liquidity mismatches which banking relies on this is quite a cheek.

Some of that reflects vulnerabilities in business models and practices of specific market participants: including liquidity mismatch in funds; leveraged and trend-following investment strategies; or insufficiently forward-looking margining practices.

Does “trend-following investment strategies” apply when the banks all piled into ( and then left with singed fingers) estate agents? Or when they lacked capital when the credit crunch hit as that is another form of margin? Anyway I am sure you have got the idea.

The issue is highlighted as we note the reference to the standard for this sort of thing.

And the canonical description of how to
achieve that is given by Walter Bagehot’s description of the ‘Lender of Last Resort’ (LOLR), which
(in essence) recommends stemming financial panics by lending freely, to sound institutions, against good
collateral, and at rates materially higher than those prevailing in normal conditions

It opens well as the Bank of England did splash the cash but at a time when the US Federal Reserve was liberally applying US Dollar swaps then “sound institutions” had a hollow ring in some cases and what is “good collateral” these days? I could write a whole article on that alone! For now let’s put that under Hmmmmmmm. Then the operations involving a Bank Rate cut, a surge in QE and the TFS were designed to give us rates materially LOWER than in normal conditions. You do not need to take my word for it as we get a confession later in the speech.

The Bank of England provided extra liquidity to banks through a wide range of facilities, at
favourable rates, in the early stages of the March crisis.

Next we get to the crux of what we might call the Hauser matter.

‘Market Maker of Last Resort’ (MMLR). Buiter
and Sibert believed that central banks, acting as MMLR, should be ready to tackle dysfunction in securities
markets relevant to monetary or financial stability, by making two way prices to buy and sell those securities,
or lending against them.

You can figure where that is going,especially if you have followed the mission creep of central banks in the credit crunch era. It is hard not to laugh as the Bank of England purchases of corporate bonds is used as an example because they were an example of a dictum used in the early stages of the Desert War ( World War Two) “order, counter order, disorder”

In case you had not figured out where we are being led.

The review of the Bank’s liquidity framework carried out by Bill Winters in 2012 recommended formalising the
Bank’s approach to MMLR, setting out public principles under which future interventions might occur……
But in the event, the Bank –
in common with other central banks – chose to say relatively little in public.

Comment

I wish now to give an example of the muddled thinking going on here. Let me start with this from the speech.

Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.

As even in these inflated times those are large numbers they have intervened on a grand scale. But apparently they do not influence the price at all.

Purchases typically took place at prevailing market prices

It gets worse.

While not charging an ‘insurance premium’ to market participants for an extended period may be understandable in a severe unexpected pandemic,

Actually they did exactly the reverse they actually paid an “insurance premium” to sellers of government bonds. What I mean by that is that they drove the price of them to record highs. For example they bought the UK’s 2068 bond in the 230s which is extraordinary for a relatively recent bond. This issue of the extraordinarily high prices paid gets ignored in the debate because these days the concentration is usually on yields. For those who prefer that the signal is that up to around the 6 year maturity the UK has negative bond yields and is paid to borrow.

Let me give you another example of what is at best muddled thinking.

driving term repo rates and government bond yields sharply higher.

Okay so the UK benchmark ten-year yield went to around 0.8% which in another perspective is historically extraordinarily low. Central banks intervened on a massive scale and it fell to 0.08% but apparently that is a “market price”

No the Bank of England set the price for UK bonds via the large scale of its purchases so could it set policy for house prices? Well this year I think we are about to find out.

 

The Bank of England has an inflation problem

In these times we have seen the technocrats grab economic power in what is something of a challenged to democracy. Often their words are more important than that of elected politicians. Also they like  to travel in a pack and are not keen on venturing outside of it. So we can learn from the latest outpourings from Bank of England Chief Economist Andy Haldane who has given 2 interviews over the past 24 hours. Or rather they have been published in that time frame.

The interview with the Guardian focused on unemployment.

Haldane said unemployment was a scourge that could leave long-lasting scars. “I saw it up close and personal in the 1980s but it is still very much visible now,” he added.

“If we are not careful those unemployment problems can become sticky. What we found from the 1980s experience is that they can become generational. It is passed down the generations and you have whole families without work.”

It is of course important to learn from the past but there is also the danger of being like a first world war general and fighting the previous war rather than the new one. Andy Haldane seems to think that things have gone as well as they can.

“Policy has been tremendously important. A huge amount of insurance has been provided by the government and the Bank of England – supporting people’s jobs, supporting incomes, supporting businesses and supporting borrowing costs. Without that insurance the outcome for jobs, incomes and the economy would have been massively, massively worse.”

He suggests a much worse path if we had not acted as we have.

Haldane said without action the 25% collapse of the economy in the spring would have pushed up the unemployment rate by 10 percentage points. “Instead of 2-3 million unemployed we would be talking about 4-5 million,” he added.

Whereas his opinion on where we are is relatively benign.

Haldane said he estimated that the UK’s unemployment rate had picked up from less than 4% to more than 6% since the arrival of the pandemic but job losses had been less severe than the Bank’s early estimates.

This time around I think we can cut them some slack on the issue of another set of forecasting errors as this year has been quite something. However there is an issue here where the Chief Economist is wither being deliberately misleading or ignorant and it relates to the way that the unemployment rate is concealing a lot of hidden unemployment. He has started the journey by quoting an unemployment rate if 6%+ when it is officially 4.9% but as you can see below it falls quite a distance short of my estimate. From the 15th of this month.

That is the impact of the furlough scheme in the main and if we quantify that we see that around 1.5 million people are in a type of hidden unemployment so putting them back in leaves us with 3.2 million unemployed or a near doubling of the numbers. On that road the unemployment rate looks to be a bit over 9%.

Perhaps our Andy is somewhat trapped by his previous optimism.

Haldane has been the most upbeat of the nine members of the Bank’s monetary policy committee in recent months.

Indeed and if we go back to the 30th of September we were told this.

Now is not the time for the economics of Chicken Licken.

For those unaware there was a description of this.

The fictional fowl who, having been hit on the head by an acorn, declared the sky was falling in.

Inflation

This morning in something of a pivot our Andy has been interviewed by Bloomberg and the main subject is inflation.

The Bank of England must have a “laser focus” on keeping inflation expectations in check after the pandemic, Chief Economist Andy Haldane said, highlighting the tricky balance the nation faces in managing its massive debt burden.

There is a lot going on in that sentence but let us start with the contradiction between the opening statement and this.

While the BOE is willing to let price growth temporarily overshoot its 2% target as the economy emerges from the current crisis, there can be no question of letting that sentiment become entrenched, he said.

We have been here before when posy the credit crunch the Bank of England let inflation rise above an annual rate of 5% in late 2011 and in fact it took another couple of years or so for it to return to target. This caused damage to real wage growth which is yet to be repaired. Thus the word “temporary” has its own section in my financial lexicon for these times.

It would appear that people are not falling for this line this time around.

Whether policy can stay that loose depends on how businesses and consumers respond when the crisis ends. A gauge by Citigroup Inc. and YouGov last week showed U.K. household inflation expectations for the next 12 months jumping.

Indeed the latest Bank of England survey suggests the same.

Question 2c: Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.9%, compared to 2.8% in August.

Indeed if we look at that survey there is quite a critique of inflation measurement in the UK.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.5%, compared to 2.6% in August.

Yet the so-called lead indicator from the Office for National Statistics tells us this.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.6% in November 2020, down from 0.9% in October 2020.

There are a load of issues headed by its inclusion of rents which do not exist ( Imputed Rents) and the fact that they are based on numbers  from last tear rather than November. But a new front has opened on the issue of puppies. Let me hand you over to Belfast Live as I should mention Northern Ireland more.

The cost of all dogs appears to have risen sharply, especially more popular breeds such as cavapoos and cockapoos.

A recent survey by Pets4Homes shows cocker spaniels have seen a price increase of more than 200% this year.

Jack Russell terriers that once sold for £350 are now on the market for £2,000.

A cavapoo which would have cost £1,000 last year, is now expected to cost around £3,000.

I have to confess I do not know what a Cavapoo is but in Battersea mini-daschunds are all the rage which prices now at £3500. Meanwhile the section Purchase of Pets in the inflation series showed an annual inflation rate of 2.7% which is something from another universe.

There is an element of self-selection in these numbers as you have to be able to pay such amounts but of you look at the Jack Russell prices you did not have to in a clear example of inflation letting rip. The issue of it being missed is one I have raised about what you might call pandemic products such as face masks and sanitiser but the official view is that they are too minor to produce any real change.

 

Comment

So our “loose cannon on the decks” has spoken and it seems he is as detached from reality as ever. For example the issues with inflation are two-fold. The first is that the Bank of England has given the economy quite a monetary push with the annual rate of broad money ( M4) growth at 13.1%. So there is an element of a “laser focus” on something it has created. Also there are issues out there.

China’s exchange moved to tighten restrictions on the trading of iron ore futures, which hit a new record high on Monday and more than double from April levels. …….Iron ore futures price has soared in recent months, with the the most traded contract on the Dalian Commodity Exchange surging nearly 10 per cent on Monday to 1,144.5 yuan ($175) ( Yuan Talks)

Dies anybody out there believe the Bank of England will respond to an inflation rise? It was only yesterday we were noting that it has switched UK debt risk into Bank Rate.

Savers have learnt about the word temporary from the Bank of England too as this is from September 2010.

“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.” ( Sir Charles Bean)

Next there is the issue of how inflation is measured as it seems increasingly to be like th science fiction series The Outer Limits.

 

 

The rise and rise of negative interest-rates

This week is ending with a topic that has become something of a hardy perennial in these times. By these times I mean the way that the Covid-19 pandemic has added to the credit crunch. An example has been provided this morning by Bank of England Governor Andrew Bailey.

BoE’s Bailey: As You Go Towards Zero And Into Negative Territory, Academic Research Says Impact Of Structure Of Banking System On Transmission Tends To Increase Most Countries That Have Used Negative Rates Have Not Used Them For Retail Deposits ( @LiveSquawk)

This has reminded markets again about the Bank of England looking at negative interest-rates which as an aside is none too bright at a time when the UK Pound is seeing pressure. Perhaps he has gone native early and started the old tactic of talking it lower. But on the subject of negative interest-rates he is both reinforcing a point made by some of his colleagues and disagreeing with them. The agreement is with this bit from Michael Saunders on the

In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps.

The disagreement has been over the impact on banks with both Michael Saunders and Silvana Tenreyro claiming they can help them a view which I consider to be evidence free. It is also contradicted by this from the Saunders speech.

For example, if the TFS (or TFSME) interest rate is
below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate
on reserves. This subsidy for banks would come at the BoE’s expense.

Firstly nice of him to confirm my point that such policies are indeed a bank subsidy. But why so banks need a different interest-rate to everyone else especially if they are unaffected.

But the clear message here has been the development of the effective lower bound or ELB. I still recall Governor Carney telling us this.

The Bank of England’s website says that the “effective lower bound” for the interest rate it sets, Bank Rate, is the current rate of 0.5%.

This is the level, according to the Bank, “below which it cannot be set” – the lowest practicable official interest rate. ( BBC March 2015)

Of course that became 0.1% when we cut to 0.1% and Governor Carney had previously contradicted his own rhetoric by cutting to 0.25% after the EU Leave vote. Well now according to Michael Saunders it has got lower again.

As discussed above, I suspect the ELB is probably somewhat below zero, but there is uncertainty around this. With this uncertainty, it may be preferable to make any further rate cuts in relatively small steps, less than the normal 25bp increments.

So 0.5% became 0.1% ( after they cut to 0.25%) and now it is somewhere below 0%. Were it not so serious this would be a comedy version of central banking 101. The other ridiculous part was claiming it was 0.5% when only across The Channel the ECB had cut below 0%.

The road below zero has been littered with official denials, although the record remains with Governor Kuroda of the Bank of Japan who imposed negative interest-rates only 8 days or a Beatles week after denying any such intention in the Japanese parliament.

Yesterday

We did not get an ECB interest-rate cut partly because they had reined back on that and partly because it looks as though there was some dissension in the camp.

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde brokered a difficult compromise this week to secure backing for a new pandemic-fighting package of measures, but her battle to convince sceptics among her colleagues and investors has only just begun.

Her claim that she had ended dissension has gone the way of well many of her other claims. But there was a nuance to the interest-rate debate as she simultaneously said down and then up.

She starts by saying “we are enlarging the volume of lending that can be obtained at those rates” And then says “we are slightly changing the reference period…. to make it a little more challenging” Seems at cross purposes… ( @LorcanRK)

It has turned out that there has been some potential tightening here, but I would not worry about it too much as once they realise it will hurt The Precious! The Precious! it will be changed. The interest-rate of -1% remains but how much of that banks can access has potentially been reduced.

I would not worry about this too much as once somebody points out to Christine Lagarde that she has made another mistake this will be reversed.

Bond Yields

We can continue the theme of mistakes by President Lagarde as someone was keen in the ECB messaging to make sure there would not be another “we are not here to close bond spreads” debacle.

We will conduct our purchases under the PEPP to preserve favourable financing conditions over this extended period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.

This was a subplot to the main event in this area.

Second, we decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. We also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

We can now move to what The Frenchman in the Matrix series of films would call cause and effect.

And BOOM!

The 10-year Spanish bond yield turned negative for the first time ever. Still somewhat of a national embarrassment that Portugal went there first, I suppose. ( @fwred)

Fred has rather stolen my thunder about what had happened in anticipation of the move.

Yesterday Portugal joined the euro zone’s growing pool of negative yields as 10-year YTM dropped to -0.1% for the first time in history.

 

Comment

As I have been typing this there has been a reminder of old times for me and well you can see for yourselves.

Money Markets Assign 65% Probability Of 10 Bps Bank Of England Interest Rate Cut By March 2021 Vs 16% At Start Of Month ( @LiveSquawk)

It is hard not to laugh as a cut of 0.1% after cuts approaching 5% would do what exactly? But it would appear that for rate cuts central bankers keep singing along with the Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

In terms of the UK we do already have negative interest-rates as both the two-year ( -0.14%) and the five-year yields ( -0.11%) are already there and as a real world issue they feed into mortgage rates because so many are at a fixed rate these days.

In terms of the world well it is arriving right now in a land down under.

An auction of three-month Australian notes on Thursday saw an average yield of 0.01%, with buyers who bid most aggressively at the sale receiving a yield of minus 0.01%. ( Bloomberg)

Adding in time to this.

 

The UK house price boom is facing higher mortgage rates

This morning will have brought sounds of high excitement and smiles to the Bank of England. It would have been too early to raid its excellent wine cellar but a liveried flunkey will have brought its best coffee to Governor Andrew Bailey as he peruses the latest news from the Halifax on UK house prices.

The average UK house price now tops a quarter of a million pounds (£250,547) for the first time in history, as annual
house price inflation rose to 7.5% in October, its highest rate since mid-2016. Underlying the pace of recent price
growth in the market is the 5.3% gain over the past four months, the strongest since 2006.

Governor Bailey will no doubt issue a satisfied smile and may mimic the end of the television series Frasier which had an “I did that” at the end. He may even be pleased that he has helped to do this without getting a mention from the Halifax.

This level of price inflation is underpinned by unusually high levels of demand, with latest industry figures showing
home-buyer mortgage approvals at their highest level since 2007, as transaction levels continue to be supercharged
by pent-up demand as a result of the spring/summer lockdown, as well as the Chancellor’s waiver on stamp duty for properties up to £500,000.

I find the “pent-up demand” bit curious as surely there will also have been pent-up supply? Bur we do see signs of a an active market.

HMRC Monthly property transactions data shows a fifth consecutive monthly rise in UK home sales
in September. UK seasonally adjusted residential transactions in September 2020 were 98,010 – up by
21.3% from August. The latest quarterly transactions (July-September 2020) were approximately 63.6%
higher than the preceding three months (April-June 2020). Year on year, transactions were 0.7% lower than
September 2019 (2.4% higher on a non seasonally adjusted basis). (Source: HMRC, seasonally-adjusted
figures)

Although I do note that whilst we have seen high rates of monthly growth it only brings us back to around what were last years levels. The picture on mortgage approvals is more clear-cut.

Mortgage approvals rose in September to the highest level seen in 13 years. The latest Bank of England figures show the number of mortgages approved to finance house purchases, rose by 7% from August to 91,454, down from a rise of 27% reported in August. Year-on-year, the September figure was 39% above September 2019.

Monetary Policy

We can now switch to what I call the Talking Heads question. From Once In A Lifetime.

And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well… how did I get here?”

The Bank of England’s role in us getting here started with the interest-rate cuts in response to the credit crunch. Then as they realised how interest-rates actually worked they added on bond buying in the form of what is called QE to reduce longer-term interest-rates too. It is easy to forget now but this did not do the trick for house prices so in the summer of 2012 we got what the then Chancellor George Osborne called credit easing. This was the Funding for Lending Scheme where the Bank of England channeled cheap cash ( Bank Rate was 0.5%) to the banks so that they did not have to indulge in the no doubt tiresome business of competing for depositors.

This was a crucial change in 2 respects. The first is access to funds at Bank Rate but in many ways more crucial is the access to large amounts of funds. So a quantity issue. This allowed banks to reduce mortgage-rates and I recall pointing out that mortgage-rates fell by 0.9% quite quickly and the Bank of England later claimed they fell by up to 2%.

Bringing this up to now we have the Term Funding Scheme operating that role and in its original form it has supplied £70.6 billion and the new pandemic era version has supplied some £49.6 billion. So as you can see the Bank of England keeps the banks supplied with cash and these days it can get it as cheap as the present Bank Rate of 0.1%. On this road we see that the cut in Bank Rate is not especially significant in itself these days but comes more into play via the Term Funding Scheme.

Next as more people moved to mortgages with fixed interest-rates ( around 92% of new mortgages last time I checked) QE also came back into play as an influence on mortgage rates via its impact on UK bond or Gilt yields. So this part of yesterday’s announcement matters.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

There are issues with the stock but for our purposes today in looking at the mortgage market it is the flow ( presently £4.4 billion a week) that matters. It has helped keep my proxy for fixed-rates, which is the five-year bond yield negative since mid June now apart from one brief flicker. As I type this it is -0.06%.

Comment

So the theme starts singing along with Steve Winwood for house prices.

I’ll be back in the high life again
All the doors I closed one time will open up again

However all the government and Bank of England pumping has the problem that it means that they are ever more socially distanced from wages and earnings. So many are on 80% wages from the furlough scheme and real wages have been falling. There has to be some sort of reckoning here in the end. As well there are signs that the pumping system is creaking.

As you can see mortgage rates for those with lower amounts of equity or if you prefer high loan to value numbers have risen quite sharply. So the heat is on especially for those with only 5% equity where they have gone above 4% which really rather contradicts all the official rhetoric of low interest-rates.  So I see trouble ahead which to be frank I welcome. I do not wish anyone ill in financial terms but we do need lower house prices to help first-time buyers.

Meanwhile something I have long warned about looks to have come true this week.

The Bank of England is investigating a potential leak of Thursday’s QE announcement ( @fergalob)

I do like the description of it being in The Sun as a “potential leak”……

Will the Bank of England give us negative interest-rates?

Later today the members of the Monetary Policy Committee ( MPC) of the Bank of England will cast their votes as to what they think monetary policy will be and as I shall explain this is a live meeting. As in I expect changes today. Unfortunately due to a change made by the previous Governor Mark Carney we will not know the result until tomorrow at midday. Remember when all of this began to be called Super Thursday and then invariably turned out to be anything but?! Tomorrow will be one as we also get the Inflation Report to update us on what is expected for the economy. But the crucial point here is that the preference for bureaucratic convenience means that we are at risk of “some animals being more equal than others” as George Orwell put it so aptly. That risk is added to by the way the ship of state is such a leaky vessel these days.

The economy

The Minutes from the September meeting suggested things were better than expected.

UK GDP in July was around 18½% above its trough in April and around 11½% below its 2019 Q4 level. High-frequency payments data suggest that consumption has continued to recover during the summer and is now at around its start-of-year level in aggregate, stronger than expected in the August Report. Investment intentions have remained very weak and uncertainties among businesses are elevated. For 2020 Q3 as a whole, Bank staff expect GDP to be around 7% below its 2019 Q4 level, less weak than had been expected in the August Report.

Since then some of that has remained true as for example UK Retail Sales have continued to be strong. But as time passed we began to see more and more Covid-19 restrictions applied, first regionally and now including as of midnight all of England.

This morning’s Markit PMI business survey tells us this.

October data indicates that the UK service sector was close
to stalling even before the announcement of lockdown 2
in England, with tighter restrictions on hospitality, travel
and leisure leading to a slump in demand for consumer facing businesses. This was only partly offset by sustained expansion in areas related to digital services, business-to business sales and housing market transactions.

So the existing restrictions had clipped the tails of the service sector. So we are left with a pattern of a manufacturing recovery and very slow services growth followed by an expectation of this.

November’s lockdown in England and a worsening
COVID-19 situation across the rest of Europe means that the UK economy seems on course for a double-dip recession this winter and a far more challenging path to recovery in 2021.

There are issues with the credibility of the PMIs after some misfires but they are relevant because the Bank of England follows them. Some of you may recall Deputy Governor Ben Broadbent guiding us towards sentiment indices like them in the autumn of 2016. The absent-minded professor seems untroubled by the fact that led him up the garden path. Also I am intrigued by them discussing the risk of a double-dip recession when this is in fact a depression with the only issue being how long it will last?

Impact of Lockdown 2

The National Institute for Economic and Social Research or NIESR thinks this.

The second wave of the virus, and newly announced November lockdown, are likely to further increase the fall in 2020 GDP to around 11-12 per cent. This includes a fall of
around 3 per cent in the fourth quarter of 2020, with additional public borrowing but a slower rise in unemployment due to the extension of the furlough scheme.

Later they refine some of this although we are in the territory of spurious accuracy.

Saturday’s announcement of a further he November lockdown in response to resurgent Covid-19 will push
growth in the fourth quarter negative, to an estimated -3.3 per cent.

So we have a change to what we were expecting because we had our concerns about the end of the furlough scheme and its impact on employment and wages which would have knock-on effects elsewhere in the economy. That now will come in early December (probably as we are not sure when the lockdown will end) but in the meantime the lockdown will push economic output around 3% lower.

Another consideration for the Bank of England will be the labour market explicitly.

Our main case scenario was for unemployment to rise to above 7 per cent in the final quarter of 2020 and 8 per cent in the first half of 2021 as the Coronavirus Job Retention Scheme (CJRS) ends: the extension in November will have reduced this at the end of 2020 but may just have
postponed it. Unemployment is expected to rise above 5 per cent until 2024, with long-term persistent unemployment exacerbated by the prospect of a long and uncertain recovery.

Of course it has been a troubled area for them as back in the early days of Forward Guidance they established an unemployment rate of 6.5% as being significant for interest-rate rises and then ignored it.

Looking ahead which is what the Bank of England should be doing today, this looks rather tenuous on the vaccine front. We do not know when or indeed if one will be ready? Also individuals may be less than keen on being injected with something about which the long-term implications cannot be known.

Comment

The analysis suggests more easing is on its way and the first part is easy. These days the role of monetary policy is primarily to encourage fiscal policy by making it as cheap as possible. Today will see another £1.473 billion spent by the Bank of England buying UK government bonds aiming at that objective. But it is running out of road on its present plan because as of the end of today it will have spent some £697 billion out of the £725 billion it has authourised. That is only about another 6 weeks worth at the current rate. Just for the avoidance of doubt the £745 billion figure often quoted includes  £20 billion of corporate bonds which is now all over bar the shouting.

So the easy bit is a vote in favour of another £100 billion of QE which kicks the can comfortably into 2021. They could do more but that takes away some of the opportunity to act or rather looking like they are acting in the future. Regular readers will know I have been expecting an extra £100 billion for a while now as this is simply implicit funding of the government.

The path for Bank Rate is more complex. I still think a move is unlikely but cannot rule out they might be silly enough to cut Bank Rate to 0%. After all with all the rate cuts we have seen another 0.1% would be pretty much laughable. As to a cut into negative interest-rates that would look rather silly when their enquiry into them is not yet complete. However some of the MPC would vote for them and the way things are looking they could easily panic and give us a negative Bank Rate in 2021. Just as a reminder we already have negative bond yields in the UK out to the 6 year maturity. Due to the way that fixed-rate mortgages have become much more popular they are as significant as Bank Rate these days.

 

 

 

The Bank of England has pumped up the housing market again

Overnight there has been quite a shift in economic sentiment. To some extent I am referring to the falls in equity markets although the real issue is the new lockdown in France and increased restrictions in Germany. As we have been noting they were obviously on their way and the Euro area now looks set to see its economy contract again this quarter. It will be interesting to see how and if the ECB responds to this in today’s meeting and these feeds also into the Bank of England. The UK has tightened restrictions especially in Northern Ireland and Wales as we now wonder what more the central banks can do in response to this?

Still even in this economic storm there is something to make a central banker smile.

LONDON (Reuters) – Lloyds Banking Group LLOY.L posted forecast-beating third quarter profit on Thursday, lowering its provisions for expected bad loans due to the pandemic and cashing in on a boom in demand for mortgages.

Britain’s biggest domestic lender reported pre-tax profits of 1 billion pounds for the July-September period, compared to the 588 million pounds average of analysts’ forecasts.

Few things cheer a central banker more than an improvement in prospects for The Precious! But we can see that there is also for them a cherry on top of the icing.

The bank booked new mortgage lending of 3.5 billion pounds over the quarter, after receiving the biggest surge in quarterly applications since 2008.

That links into the theme of monetary easing which of course is claimed to help businesses but if you believe the official protestations somehow inexplicably ends up in the housing market every time. So let us look at the latest monetary data which has just been released. Oh and one point before I move on, what use are analysts who keep getting things so wrong?

Mortgages

Whoever was responsible for the Bank of England morning meeting today must have run there with a smile on their face and gone through the whole release word by word.

The mortgage market strengthened a little further in September. On net, households borrowed an additional £4.8 billion secured on their homes, following borrowing of £3.0 billion in August. This pickup in borrowing follows high levels of mortgage approvals for house purchase seen over recent months. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered reaching levels slightly higher than the average of £4.0 billion in the six months to February 2020. The increase on the month reflected higher gross borrowing of £20.5 billion, although this remains below the February level of £23.4 billion.

From their perspective they will see this as a direct response to the interest-rate cuts and QE they have undertaken as net mortgage borrowing has gone from £0.2 billion in April to £4.8 billion. Something they can achieve.

The outlook,from their perspective, looks bright as well.

The number of mortgage approvals for house purchase continued increasing sharply in September, to 91,500 from 85,500 in August (Chart 1). This was the highest number of approvals since September 2007, and is 24% higher than approvals in February 2020. Approvals in September were around 10 times higher than the trough of 9,300 approvals in May.

At this point we have what in central banking terms is quite an apparent triumph as they have lit the blue touch paper for the housing market. It has not only been them as there have also been Stamp Duty reductions but we see that there is an area of the economy that monetary policy can affect.

As to what people are paying? Here are the numbers.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn, and the outstanding stock of, mortgages were little changed in September. New mortgage rates were 1.74%, an increase of 2 basis points on the month, while the interest rate on the stock of mortgage loans fell 1 basis point to 2.13% in September.

Money Supply

Curiously the Money and Credit release does not tell us the money supply numbers these days although we do get this.

Overall, private sector companies and households increased their holdings of money in September. Sterling money (known as M4ex) increased by £10.8 billion in September; a significant rise from August which saw withdrawals of £1.0 billion (Chart 5). This is a continuation of the trend of strong deposit flows seen between March and July, albeit at a much weaker pace in comparison to the £40.5 billion monthly average seen during that period.

In essence this is part of the higher savings we have observed where people have furlough payments to keep incomes going but opportunities to spend them have been cut.

I have looked them up and annual M4 (broad money) growth was 11.6% in September. So we are seeing a push of the order of 12% which is more than in the Euro area.

Consumer Credit

Here the going has got a lot tougher and the monetary push seems to be fading already.

Household’s consumer credit weakened in September with net repayments of £0.6 billion, following some additional net borrowing in July (£1.1 billion) and August (£0.3 billion).

Actually the numbers have established something of an even declining trend since July. This means that the detail looks really rather grim.

Although the repayment in September was small in comparison to the £3.9 billion monthly average seen between March and June, this contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows pushed the annual growth rate down further in September to -4.6%, a new series low since it began in 1994.

In fact it is essentially repayment of credit card debt.

The net repayment of consumer credit was driven by a net repayment on credit cards of £0.6 billion

So it has an annual growth rate of -11.3% now. That is probably due to the price of it which is something of a binary situation.For those unaware there have been quite a few 0% offers in the UK for some time now but this is also true for others.

The cost of credit card borrowing was also broadly unchanged at 17.92% in September.

Although blaming the interest-rate for credit card borrowing does have the problem that overdraft interest-rates have been on quite a tear.

The effective rates – the actual interest rate paid – on interest-charging overdrafts continued to rise in September, by 3.52 percentage points to 22.52%. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Perhaps those that can have switched to the much cheaper personal loans.

Rates on new personal loans to individuals were little changed in September, at 4.78%, compared to an interest rate of around 7% in early 2020.

As you can see Bank of England policy has been effective in reducing the price of those.

Comment

The present situation gives us an insight into the limits of monetary policy and as to whether we are “maxxed out”. We see that the Bank of England interest-rate cuts, QE bond purchases (another £4.4 billion this week) and credit easing can influence the housing market and personal loans. However we have also noted the way that more risky borrowers are now wondering where all the interest-rate cuts went? For example a 2 year fixed rate with a 5% deposit was 2.74% in July as the Bank of England pushed rates lower but was 3.95% in September, or a fair bit higher than before the easing ( it was typically around 3%).

So we see that monetary policy is colliding with these times even before we get out into the real economy and a reason for this can be see on this morning’s release from Lloyds Bank. Some £62.7 billion of mortgages went into payment holidays of which £9.1 billion have been further extended and £2.2 billion have missed payments. No doubt the banks fear more of this and this is why they are tightening credit for riskier borrowers which operates in the opposite direction to Bank of England policy.

So the easing gets muted and we are left mostly with the easing of credit for the government as the instrument of policy right  now.

 

 

 

 

The Bank of England has become an agent of fiscal policy

It is time to take a look at the strategy of the Bank of England as there were 2 speeches by policymakers yesterday and 2 more are due today including one from the Governor. But before we get to them let us first note where we are. Bank Rate is at 0.1% which is still considered by the Bank of England to be its lower bound, however it did say that about 0.5% and look what happened next! We are at what might now be called cruising speed for QE bond purchases of just over £4.4 billion per week. Previously this would have been considered fast but compared to the initial surge in late March it is not. The Corporate Bond programme has now reached £20 billion and may now be over as the Bank has been vague about the target here. That is probably for best as whilst the Danish shipping company Maersk and Apple were no doubt grateful for the purchases there were issues especially with the latter. It is hard not to laugh at the latter where the richest company in the world apparently needed cheaper funding. Also we have around £117 billion deployed as a subsidy for banks via the Term Funding Scheme and some £16 billion of Commercial Paper has been bought under the Covid Corporate Financing Facility of CCFF.

The Pound’s Exchange Rate

It has been a volatile 2020 for the UK Pound £ as the Brexit merry-go-round has been added to by the Covid-19 pandemic. The initial impact was for the currency to take a dive although fortunately one of the more reliable reverse indicators kicked in as the Financial Times suggested the only was was down at US $1.15. Yesterday saw a rather different pattern as we rallied above US $1.31. However as we widen our perspective we have been in a phase where both the Euro and the Yen have been firm,

If we switch to the trade-weighted or effective index we see that the Pound fell close to 73 in late March but has now rallied to 78. Under the old Bank of England rule of thumb that is equivalent to a 1.25% increase in Bank Rate. Right now the impact is not as strong due to trade issues but even if we say 1% that is a big move relative to interest-rates these days.

Ramsden

Deputy Governor Ransden opened the batting in his speech yesterday by claiming  that lower interest-rates were nothing at all to do with the cuts he and his colleagues have voted for at all.

Over time, these developments reduced the trend interest-rate, big R*, required to bring stocks of capital and wealth into line. And policy rates, including in the UK, followed the trend downwards.

So we no longer have to pay him a large salary and fund an index-linked pension as doe example AI could do the job quite easily? Also it is hard not to note that we would not be told this if the interest-rate cuts had worked.

As a former official at HM Treasury one might expect him to be a fan of QE as it makes the Treasury’s job far easier so this is little surprise.

QE has been an effective tool for stimulating demand through the 11 years of its use in the UK .

Really? If it has been so effective why has it been required for 11 years then? He moves onto a suggestion that there is plenty of “headroom” for more of it. This is followed by an extraordinary enthusiasm for central planning.

But again my starting point is that we have plenty of scope to affect prices. While yields on longer-dated Gilts are at historically low levels, that does not mean they could not still go lower.

There is a problem with his planning though because the QE he is such an enthusiast for has given the UK negative interest-rates via bond yields. At the time of writing maturities out to 6 years or so have negative yields of around -0.06%, Yet he is not a fan of negative interest-rates.

While there might be an appropriate time to use negative interest-rates, that time is not right now, when the economy and the financial system are grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties this crisis has created.

Ah okay, so he is worried about The Precious! The Precious! Curious that because we are told they are so strong.

the banking sector as a whole starts from a position of strength.

Perhaps somebody should show Deputy Governor Dave a chart of the banks share prices. That would soon end any talk of strength. Also if you are Deputy Governor for Markets and Banking it would help if you had some idea about markets.

As a generic I would just like to point out that those who claim the Bank of England is independent need to explain how it has come to be that all the Deputy-Governors have come from HM Treasury?

The Chief Economist

The loose cannon on the decks has been on the wires this morning as he has been speaking at a virtual event. From ForexLive

  • Nothing new to say on negative rates
  • BOE is doing work on negative rates, not the same as being ready to use it
  • Monetary policy can provide more of a cushion to the crisis
  • But more of the heavy lifting has to be done by fiscal policy

Actually he then went on what is a rather odd excursion even for him.

There Is An Open Question Whether Voluntary Or Involuntary Social Distancing Is Holding Back Spending ( @LiveSquawk)

For newer readers he seems to be on something of a journey as previously one would expect him to be an advocate of negative interest-rates whereas now he is against them.

Comment

There is a sub-plot to all of this and let me ask the question is this all now about fiscal policy? The issues over monetary policy are now relatively minor as any future interest-rate cuts will be small in scale to what we have seen and QE bond buying is on the go already. The counterpoint to this is that the Bank of England has seen something of a reverse takeover by HM Treasury as its alumni fill the Deputy Governor roles. Its role is of course fiscal policy.

The speech by Deputy Governor Ramsden can be translated as we will keep fiscal policy cheap for you as he exhibits his enthusiasm for making the job of his former colleagues easier. That allows the Chancellor to make announcements like this.

Chancellor Rishi Sunak is to unveil new support for workers and firms hit by restrictions imposed as coronavirus cases rise across the UK.
He is due to update the Job Support Scheme, which replaces furlough in November, in the Commons on Thursday. ( BBC )

So we have been on quite a journey where we were assured that monetary policy would work but instead had a troubled decade. Whilst the Covid-19 pandemic episode is a type of Black Swan event there is the issue that something would be along sooner or later that we would be vulnerable to. Now central banks are basically faciliatators for fiscal policy. This brings me to my next point, why are we not asking why we always need more stimuli? Surely that means there is an unaddressed problem.

Time for some Bank of England Bingo for savers

Earlier this morning the Bank of England announced that it was taking the advice of the apocryphal civil servant Sir Humphrey Appleby by applying some “masterly inaction”

At its meeting ending on 4 August 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to continue with its existing programmes of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, maintaining the target for the total stock of these purchases at £745 billion.

Let me first focus on an interest-rate of 0.1% and take you back to the 28th of September 2010.

 “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.

“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.”  ( Deputy Governor Charlie Bean)

Savers will be eating “into their capital a bit” more these days as the “swings and roundabouts” never turned up but there was a slide with Bank Rate now 0.1% compared to the emergency 0.5% back then, That provides something of a contradiction to something else our Charlie said.

The Deputy Governor said the Bank’s 0.5  per cent base rate was part of an “aggressive policy” to deal with a “once-in-a-century” financial crisis.

What do you do with someone who gets the future completely wrong?

Sir Charles joined the OBR in January 2017 and also holds a part-time Professorship at the London School of Economics.

Yes you give them a job forecasting the economy. This is along the lines of Yes Prime Minister where an individual who does not even have a television is suggested as a perfect Governor for the BBC. You may note that rather than the slide that savers are on Sir Charles has been on a roundabout of other establishment jobs to top up his already substantial RPI linked pension. Yes the same RPI which is officially a bad measure of inflation until it applies personally.

Negative Interest-Rates.

In some ways it is hard to know where to start with this.

Some central banks have judged their ELB to be below
zero, and have implemented negative policy rates as a tool to stimulate the economy. In recent years, the MPC has
judged that the ELB for Bank Rate is close to but just above zero. But that judgement can change, and in the past
has changed.

Actually I have had two minor successes here. Firstly they admit negative interest-rates exist as believe it or not past analysis ignored the fact that merely crossing either The Channel or the Irish Sea took interest-rates to -0.6% and -1% for banks. Also that the view on the Effective Lower Bound or ELB switched overnight from 0.5% to 0.1%. Laughable really but nor as wild as the swings at the Bank of Canada.

The reality is that they are preparing us for a move to a negative Bank Rate. This is because the brighter ones there know they are in trouble.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

But they are not bright enough to realise it is a trap of their own making. Meanwhile the PR spinning goes on.

The global fall in central bank interest rates to very low levels in part reflects falls in the ‘equilibrium interest rate’
— the interest rate at which monetary policy is neither expansionary nor contractionary.

So all the interest-rate cuts are nothing at all to do with them really, which is curious as only a couple of paragraphs earlier it is up to them.

The MPC is currently considering whether the ELB for Bank Rate could be below zero; that is whether a negative
policy rate could provide economic stimulus.

Indeed just on the wires as I type this comes another entry in my theme of never believe anything until it is officially denied.

BOE’s Bailey, negative rates are in the toolbox but no plans to use them ( @mhewson_CMC )

Quantitative Easing

There will be some ch-ch-changes here starting next week.

The Bank intends to purchase evenly across the three gilt maturity sectors.  For operations scheduled between 11 August 2020 and 16 December 2020 the planned size of auctions will be £1,473mn for each maturity sector. This auction size includes the reinvestment of the £7.0bn cash flows associated with the maturity on 7 September 2020 of a gilt owned by the APF.

So we see that a weekly rate of purchases of £6.9 billion will fall to slightly over £4.4 billion and if we allow for the Operation Twist style refinancing that is a bit below 60% of what it was.

Forecasts

It seems that the spirit of Professor Sir Charles Bean lives on.

The UK economic slump caused by Covid-19 will be less severe than expected, but the recovery will also take longer, the Bank of England has said.

It expects the economy to shrink by 9.5% this year.

While this would be the biggest annual decline in 100 years, it is not as steep as the Bank’s initial estimate of a 14% contraction. ( BBC)

Of course our valiant Knight’s present employer has done even worse. Who could possibly have expected this?

Housing Market

The Bank of England will have been fully behind this.

An overhaul of the country’s outdated planning system that will deliver the high-quality, sustainable homes communities need will be at the heart of the most significant reforms to housing policy in decades, the Housing Secretary has announced today (6 August 2020).

The landmark changes will transform a system that has long been criticised for being too sluggish in providing housing for families, key workers and young people and too ineffectual in obligating developers to properly fund the infrastructure – such as schools, roads and GP surgeries – to support them. ( UK Government)

There is even time for some smaller businesses rhetoric.

The changes will be a major boost to SME builders currently cut off by the planning process.

Are they the same ones which were supposed to be boosted by the Funding for Lending Scheme of the summer of 2012? How has that been going?

The current system has shown itself to be unfavourable to small businesses, with the proportion of new homebuilding they lead on dropping drastically from 40% 30 years ago to just 12% today.

Comment

Let me open with the economic view which is that 2020 so far has turned out not to be as bad as the Bank of England previously thought. That is welcome and we have seen a spread of better news. That means that their panic-stricken rush to cut Bank Rate to 0.1% was yet another policy mistake which they seem set to compound by cutting to negative interest-rates. Of course they have already inflicted negative bond yields on us ( up to around the 7 year maturity) via their financing of the UK government with total QE purchases now some £645 billion.

I am ignoring their forecasts for 2021 because the have just demonstrated they know not a lot about 2020 so how they know 2021? Also the next real clue comes when the furlough scheme runs out later this year.

Meanwhile since the Bank of England has gone quiet on the policy front one thing has improved which is the value of the UK Pound £. The headline of nearly US $1.32 flatters it as the real move in effective or trade-weighted terms has been from 73 to 78. Actually that shift itself is welcome as the anti-inflationary move versus the US Dollar has been larger than elsewhere. That leaves the intellectual titans at the Bank of England in quite a quandary because they want inflation higher so they can make people and savers worse off. You think that is too silly for them? Not in a world where the Governor of the Bank of England can publicly state cutting interest-rates works in an upswing.

BoE’s Bailey: Effectiveness Of Negative Rates Depends On What Point Of Cycle They Are Used, ECB Research Suggests Most Effective In An Upswing ( @LiveSquawk)

Is that how the ECB ended up with a deposit rate of -0.6%? If so the Euro area economy must have seen quiet a boom…..Oh wait.

The Investing Channel

 

 

Where next for UK house prices?

Today we are going to start by imagining we are central bankers so we will look at the main priority of the Bank of England  which is UK house prices. Therefore if you are going to have a musical accompaniment may I suggest this.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me…  ( Yazz0(

In fact it fits the central banking mindset as you can see below. Even in economic hard times the only way is up.

Now we may not know, huh,
Where our next meal is coming from,
But with you by my side
I’ll face what is to come.

From the point of view of Threadneedle Street the suspension of the official UK house price index is useful too as it will allow the various ostriches to keep their head deep in the sand. This was illustrated in the Financial Stability Report issued on the 7th of May.

As a result, the fall in UK property prices incorporated in
the desktop stress test is less severe than that in the 2019 stress test.

Yes you do read that right, just as the UK economy looked on the edge of of substantial house price falls the Bank of England was modelling weaker ones!

Taking these two effects together, the FPC judges that a fall of 16% in UK residential property prices could be
consistent with the MPR scenario. After falling, prices are then assumed to rise gradually as economic activity in the
UK recovers and unemployment falls in the scenario.

Whether you are reassured that a group of people you have mostly never heard of forecast this I do not know, but in reality there are two main drivers. The desire for higher house prices which I will explain in the next section and protection of “My Precious! My Precious!” which underpins all this.

Given the loan to value distribution on banks’ mortgage books at the end of 2019, a 16% house price fall would not be likely to lead to very material losses in the event of default.

So the 16% was chosen to make the banks look safe or in central banking terms “resilient”

Research

I did say earlier that I would explain why central bankers are so keen on higher house prices, so here is the latest Bank Underground post from yesterday.

Our results also suggest that the behaviour of house prices affects how monetary policy feeds through. When house prices rise, homeowners feel wealthier and are more able to refinance their mortgages and release housing equity in order to spend money on other things. This can offset some of the dampening effects of an increase in interest rates. In contrast, when house prices fall, this channel means an increase in interest rates has a bigger contractionary effect on the economy, making monetary policy more potent.

Just in case you missed it.

Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

So even the supposedly independent Bank Underground blog shows that “you can take the boy out of the city but not the city out of the boy” aphorism works as we see it cannot avoid the obsession with house prices. The air of unreality is added to by this.

 we look at the response of non-durable, durable and total consumption in response to a 100bp increase in interest rates.

The last time we had that was in 2006/07 so I am a little unclear which evidence they have to model this and of course many will have been in their working lives without experiencing such a thing. Actually it gives us a reason why it is ever less likely to happen with the present crew in charge.

When the share of constrained households is large, interest rate rises have a larger absolute impact than interest rate cuts.

Oh and is that a confession that the interest-rate cuts have been ineffective. A bit late now with Bank Rate at 0.1%! I would also point out that I have been suggesting this for some years now and to be specific once interest-rates go below around 1.5%.

Reasons To Be Cheerful ( for a central banker )

Having used that title we need a part one,two and three.

1.The UK five-year Gilt yield has gone negative in the last week or so and yesterday the Bank of England set a new record when it paid -0.068% for a 2025 Gilt. As it has yet to ever sell a QE bond that means it locked in a loss. But more importantly for today’s analysis this is my proxy for UK fixed-rate mortgages. So we seem set to see more of this.

the average rate on two and five year fixed deals have fallen to lows not seen since Moneyfacts’ electronic records began in July 2007. The current average two year fixed mortgage rate stands at just 2.09% while the average rate for a five year fixed mortgage is 2.35%. ( Moneyfacts 11th May)

2. The institutional background for mortgage lending is strong. The new Term Funding Scheme which allows banks to access funding at a 0.1% Bank Rate has risen to £11.9 billion as of last week’s update. Also there is the £107.1 billion remaining in the previous Term Funding Scheme meaning the two add to a tidy sum even for these times. Plus in a sign that bank subsidies never quite disappear there is still £3 billion of the Funding for Lending Scheme kicking around. These schemes are proclaimed as being for small business lending but so far have always “leaked” into the mortgage market.

3. The market is now open. You might reasonably think that a time of fears over a virus spreading is not the one to invite people into your home but that is apparently less important than the housing market.  Curious that you can invite strangers in but not more than one family member or friend.

News

Zoopla pointed out this earlier.

Buyer demand across England spiked up by 88% after the market reopened, exceeding pre-lockdown levels in the week to 19th May; this jump in demand in England is temporary and expected to moderate in the coming weeks

Of course an 88% rise on not very much may not be many and the enthusiasm seemed to fade pretty quickly.

Some 60% of would-be home movers across Britain said they plan to go ahead with their property plans, according to a new survey by Zoopla, but 40% have put their plans on hold because of COVID-19 and the uncertain outlook.

Actually the last figure I would see as optimistic right now.

Harder measures of market activity are more subdued – new sales agreed in England have increased by 12% since the market reopened, rising from levels that are just a tenth of typical sales volumes at this time of year.

Finally I would suggest taking this with no just a pinch of salt but the full contents of your salt cellar.

The latest index results show annual price growth of +1.9%. This is a small reduction in the annual growth rate, from +2% in March.

Comment

So far we have been the very model of a modern central banker. Now let us leave the rarified air of its Ivory Tower and breathe some oxygen. Many of the components for a house price boom are in place but there are a multitude of catches. Firstly it is quite plain that many people have seen a fall in incomes and wages and this looks set to continue. I know the travel industry has been hit hard but British Airways is imposing a set of wage reductions.

Next we do not know how fully things will play out but a trend towards more home working and less commuting seems likely. So in some places there may be more demand ( adding an office) whereas in others it may fade away. On a personal level I pass the 600 flats being built at Battersea Roof Garden on one of my running routes and sometimes shop next to the circa 500 being built next to The Oval cricket ground. Plenty of supply but they will require overseas or foreign demand.

So the chain as Fleetwood Mac would put it may not be right.

You would never break the chain (Never break the chain)

We should finally see lower prices but as to the pattern things are still unclear. So let me leave you with something to send a chill down the spine of any central banker.

Chunky price cut for Kent estate reports
@PrimeResi as agent clips asking price from £8m to £5.95m (26%). (£) ( @HenryPryor)

Me on The Investing Channel

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…

Comment

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?