UK Mortgage Lending surges to a record high

Today brings us up to date with what is now a year of the Bank of England going what can be called all in on monetary policy. We have seen its Bank Rate cut to 0.1% and its QE bond purchases if we includes the corporate bonds, raised from £445 billion to £833 billion on its way to £895 billion later this year. There have been various loan support schemes as well with the CCFF where the Bank buys commercial paper at £7.2 billion. That includes 2 erstwhile members of the European Super League with Tottenham Hotspur at £175 million and Arsenal at £120 million, or if you prefer a North London thing.My alma mater the LSE is in there at £80 million too

There are three contexts we can look at to give us a perspective on this. Firstly the economy seems to be showing ever more signs of moving forwards. In this instance someone at BBC Business seems to have had a sweet tooth over the weekend.

‘People are literally running in to shop… We bagged up the pick n mix and it was sold out in under an hour’ Gordon Gibb, owner of Flamingoland in Yorkshire, told @seanfarrington his business got a boost over the early May bank holiday.

This backs up this from Ernst and Young.

A substantially stronger April CBI distributive trades survey shows consumers significantly stepping up their spending, both in the run-up to non-essential retailers re-opening on 12 April and in the immediate aftermath. The survey only captures three days of the re-opening of non-essential retailers (the survey covers 25 March – 15 April).

Also this morning’s Markit IHS release could hardly be more positive.

The manufacturing sector was flooded with optimism
in April as the PMI rose to its highest level since July 1994,
bolstered by strong levels of new orders and the end of
lockdown restrictions opened the gates to business. It was
primarily the home market that fuelled this upsurge in
activity though more work from the US, Europe and China
demonstrated there were also improvements in the global

If we now shift to the international position there have been a couple of developments today. Here is David Sheppard of the Financial Times.

EU carbon price hits a record high above €50 a tonne, pushing the cost of polluting for industries covered by the EU Emissions Trading System to roughly double their pre-pandemic level Huge ramifications for power generation and manufacturing #EUETS

That looks another signal of inflation on its way which gives another context to easy monetary policy. Also plants may have another view on carbon dioxide being pollution. The inflation theme continued if we look again at the Markit survey of UK manufacturing.

The resulting input
shortages kept producer price inflation among the highest
over the past four years. Manufacturers have generally
passed on these costs to customers, as highlighted by a
survey-record rise in selling prices,

Then if we look at Denmark we see that contrary to the supposed trend we see that negative interest-rates are spreading. From the quarterly release from Jyske Bank.

Effective 11 June 2021, Jyske Bank changes the variable interest rate on corporate clients’ demand deposits to -0.95% p.a. from -0.75% p.a.


It was only on Friday we looked at this from the Nationwide.

New record high average price of £238,831,
up £15,916 over the past 12 months.

Today we see one of the main drivers of it from the mortgage data and the emphasis is mine.

Mortgage borrowing was very strong in March with individuals borrowing an additional £11.8 billion secured on their homes (Chart 1). This was the strongest net borrowing on record since the series began in April 1993, with the previous peak in October 2006 (£10.4 billion). The strength in net lending reflected gross lending also reaching a new series high in March (£35.6 billion). The strong borrowing was driven by the expected ending of the temporary stamp duty tax relief at the end of March, which has now been extended to the end of June.

When you consider the booms we have seen that number is quite something. I note that it is backed up by a surge in gross lending as well. In terms of totals we passed the £1.5 trillion level in January and is now £1.516 trillion. Moving further up the mortgage chain seems to back that up.

The strength in mortgage borrowing follows a large number of approvals for house purchase. These approvals have fallen from a recent peak of 103,100 in November to 82,700 in March, but they remained relatively strong. In February 2020, there were 73,000 approvals for house purchase.

As to mortgage rates they will not make the Governor of the Bank of England Andrew Bailey quite so happy as he has gone to enormous effort to get them below pre pandemic levels.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 4 basis points to 1.95% in March. That is above the rate in January 2020 (1.85%), and compares to a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained broadly unchanged at a series low of 2.08%.

That is a reflection of the rising bond yields we have been seeing in recent months. I think there is more to come as my indicator for this which is the UK five-year bond yield is at 0.39% and has risen by quite a bit more than the 0.1% rise in mortgage rates since January. So we could easily see new mortgage rates not only go above 2% but reach the existing stock level at 2.08%.

Of course Governor Andrew Bailey has experience of things he has tried to cut rising for his days at the Financial Conduct Authority. There he tried to cut overdraft rates from around 19%. As they are now 33.5% you can see what a botched effort that was.

Consumer Credit

This used to be called unsecured credit but that was replaced with the much more friendly sounding consumer credit. However the trend over the past year or so has been anything but friendly.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). A further net repayment of £0.5 billion in March this year was, however, a little smaller than seen on average each month over the past year (£1.9 billion). It was also a smaller net repayment than in March 2020 (£4.1 billion), so the annual growth rate – while remaining weak at -8.6% in March – rose from its series low of -10% in February.

In terms of detail we get very little as for example it has been quite some time since we got a steer as to what is happening with car finance. All we are told is that it is mostly a credit card game.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.4 billion) and other forms of consumer credit (£0.2 billion). The annual growth rates of both components have risen from series lows, but remained weak at -18.5% and -4.1%, respectively.


We see record house prices accompanied by record mortgage lending. If we jump back just over a year to when the Bank of England was making its decisions at the peak of the crisis in mid-March last year it would have been very pleased if it knew the future. But there are issues with this and let me give you something heading the other way. We do nit get told this in the release but of you look at the numbers repayments at £23.8 billion must have been a record too. So some are heading in the opposite direction to official policy.

That leads us to the issue of saving which we see has boomed as well during the pandemic. I wait to see how economics research covers this as we see exactly the opposite of what economics 101 has told us with lower interest-rates being associated with more not less saving. Some of it has been forced but far from all of it. That leads to another line of though as if the past of the UK is any guide we will see at least some of the saving head for the housing market as time passes.

The money supply numbers are now being influenced by the fact that policy was eased a year ago so annual growth fell by 3% to 12.3%. But the heat is still on as we note that monthly growth was 0.5%. Pre pandemic that would have been considered to be rather hot.






China moves to tighten monetary policy

This morning has brought something which raised a bit of a wry smile. It came from the People’s Bank of China and the emphasis is mine.

At the end of March, the balance of broad money (M2) was 227.65 trillion yuan, a year-on-year increase of 9.4%, and the growth rate was 0.7 percentage points lower than the end of the previous month and the same period last year; the balance of narrow money (M1) was 61.61 trillion yuan, a year-on-year increase of 7.1%. The growth rate was 0.3 percentage points lower than the end of the previous month and 2.1 percentage points higher than the same period last year;

It was the case for many years that China had faster money supply growth than the West. But as you can see it is a fair bit lower now as for example the latest broad money growth in the Euro area is shown below.

Annual growth rate of broad monetary aggregate M3 decreased to 12.3% in February 2021 from 12.5% in January.

There are various contexts here and the first is the 3% difference in broad money growth rate. This matters in terms of monetarist theory because it leads into growth in nominal economic output or GDP with a lag of 18-24 months. So either the Euro area is going to grow faster than China or we will see an inflationary push. These days the inflationary push tends to turn up in asset prices such as house prices rather than consumer inflation especially in the Euro area where its measure ignores owner-occupied housing.

Also narrow money is growing more slowly than broad money which would put most Western central bankers into quite a spin. The gap between China and the Euro area is even more pronounced here.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

So a difference in annual growth rate of a bit over 9%.

What are economic prospects?

The South China Morning Post pointed out this last week.

China’s economic growth rate for this year has been raised by the International Monetary Fund (IMF), which believes a way out of the unprecedented coronavirus crisis is becoming “increasingly visible” around the world.

The Washington-based organisation on Tuesday raised China’s economic growth estimate for 2021 to 8.4 per cent, 0.3 percentage points higher than in its January prediction,  with the 2020 estimate left unchanged at 5.6 per cent.

Should that turn out to be true and I am thinking in broad brush terms as the IMF is maybe having a laugh using decimal points. We see that China is expecting faster economic growth with slower money supply growth.

Time to Tighten?

Firstly let me apologise to any Western central bankers reading this next bit as it must be discombobulating. Please make sure you are sitting comfortably as we join the China Economic Review..

China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fueled coronavirus recovery renewed concerns about asset bubbles and financial stability, reported the Financial Times.

New loan growth hit 16% in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at roughly the same level as last year, if not lower, according to FT sources with knowledge of the situation.

The directive could translate into a considerable drop in bank lending, the largest source of financing for the world’s second-largest economy, said the FT.

The policy mechanism of using a quantity measure is one that also differentiates China from the West or at least it did. The reason here is that Western experience was that trying to control lending in one area led to two problems. Firstly that it is a blunt instrument that tends to impact on all lending including that to the real economy and thus affects economic growth. Next that lending for property is hidden via all sorts of machinations so that we get what is called disintermediation where the official measures do not count what the officials think they do.

Thus after various failures we abandoned such policies although the new enthusiasm for macroprudential policies may mean we are back on the case soon or as The Who put it.

Meet the new boss
Same as the old boss

Those calculating the numbers are likely to need to mull this part of the lyrics as well.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again, no, no

Another issue is that as the impacts collide and the economy slows the measures tend to get abandoned before their time.

What is the state of play?

From the PBOC.

At the end of March, the balance of domestic and foreign currency loans was 186.44 trillion yuan, a year-on-year increase of 12.3%. The balance of RMB loans at the end of the month was 180.41 trillion yuan, a year-on-year increase of 12.6%, and the growth rate was 0.3 and 0.1 percentage points lower than the end of the previous month and the same period of the previous year, respectively.

Is Inflation on the rise?

Late last week brought news of changes as we look up the inflation chain. From the National Bureau of Statistics.

2021 March, the country’s industrial producer prices rose 4.4% , up 1.6% ; industrial producer prices rose 5.2% , up 1.8%

The area pushing this change is below.

Among them, the price of mining and quarrying industry increased by 12.3% , the price of raw material industry increased by 10.1% , and the price of processing industry increased by 3.4% .

This has led to a response this morning.

China will strengthen controls on the raw materials market to help limit costs for companies that have been pressured by a surge in commodity prices, China National Radio reported, citing Premier Li ( @FirstSquawk)


We see that China is switching to tightening monetary policy as we mull how much ahead of us in the West it is? As we cannot raise interest-rates by much I believe that we will convert to the Chinese way when the time comes here although it still feels a long way away. Returning to the domestic issue there are consequences as we note house price growth.

On a year-on-year basis, new home prices in first-tier cities rose 4.8 percent in February, up 0.6 percentage points from January, while those in second-tier cities edged up 4.5 percent, compared with the 4.1 percent increase in January.

Resale home prices in first-tier cities grew 10.8 percent from a year earlier, expanding 1.2 percentage points from the growth in January. ( Shine)

How much will they be willing to cut growth and will they accept falling house prices to improve affordability?

According to Bloomberg the crunch is already impacting students.

Last month authorities effectively shuttered student access to the once ubiquitous online loan industry, a sprawling collection of apps, fintechs and other unregulated lenders. Internet platforms were told to stop offering online loans to students and unwind existing credit. Banks will need to seek regulatory approval before promoting such loans on campus.

The loans look not a little usurious to me.

Historically there were next to no affordability checks on short-term loans to students, where annualized rates are typically between 15% and 24%.

What could go wrong?

Well for a start this.

Zhang Chunzi, a 25-year-old who works at a foreign trade company in Hangzhou, still has 150,000 yuan of loans outstanding from a dozen platforms including Ant Group Co.’s Jiebei service.

Zhang, who lost her job in February last year due to the pandemic and only just found a new job in June, makes a monthly 6,000 yuan after-tax.

“I get calls and text messages from debt collectors almost every day,” Zhang said. Nearly all of her attempts to negotiate lower interest payments have been rejected and collection staff have even called her new employer. “It’s very scary.”


Consumer Credit in the US both booms and falls…..

Last night brought something intriguing from the US economy so let us take a look at the state of play in its credit market.

In February, consumer credit increased at a seasonally adjusted annual rate of 7.9 percent. Revolving credit increased at an annual rate of 10.1 percent, while nonrevolving credit increased at an annual rate
of 7.3 percent.

So we have a number that looks like it belongs to the good old days pre pandemic although as Michael Goodwell points out there were not so many of these even then.

Total US consumer credit for February rose by $27.57 billion versus $2.8 billion estimate.

Highest gain since $29.225 billion in November 2017.

In terms of the two categories then what is called  non revolving credit grew by  US $19.5 billion and in case you are wondering what these are?

Includes motor vehicle loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations.

So mostly car loans and student loans. According to the Federal Reserve a car loan costs around 5% and the average size is around US $34,000. Revolving credit grew by US $8.1 billion presumably because it is more expensive as for example credit card debt costs 15-16%.

So US Consumer Credit is now US $4205 billion

What about Retail Sales?

The numbers above do not fit well with the numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2021, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $561.7 billion, a decrease of 3.0
percent (±0.5 percent) from the previous month, and 6.3 percent (±0.7 percent) above February 2020.

The general theme of a US economic recovery works with the annual comparison. But the monthly data does not because we see that people have borrowed to spend less. Maybe we will see a rise next month but in general you borrow to buy a car as you buy it.

Seasonal Adjustment

There is a possible swerve here because if we move to the actual numbers for US Consumer Credit they fell by US $3.8 billion. So the growth reported in the headlines relies on the seasonal adjustment at a time when very little is normal.

Federal Reserve Minutes

These were typical of the times and let us start with some good news.

The U.S. economic projection prepared by the staff for
the March FOMC meeting was considerably stronger
than the January forecast.

Part of this was driven by the President Biden fiscal stimulus plan.

Moreover, the size of the ARP enacted in March was considerably larger than what the staff had assumed in the January projection.

I think that the fiscal stimulus led to this which is the opposite of what you might expect after an upgrade to economic expectations. The emphasis is mine.

In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its
holdings of Treasury securities by at least $80 billion per
month and agency mortgage-backed securities by at least
$40 billion per month until substantial further progress had been made toward the Committee’s maximumemployment and price-stability goals.

It is kind of them to confirm my long-running theme that policy easing is for now and that policy tightening is for the distant future and sometimes the far distant future. But then they switch to being misleading.

They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses

The main flow of support is to the US government yet it apparently does not merit a mention! It does merit one in another form elsewhere.

The Treasury yield curve steepened over the intermeeting period, with 5- and 10-year yields rising markedly

If we return to the economic situation we find that the Fed has rather fumbled the ball. It indulged in some Open Mouth Operations in January suggesting it would reduce or taper its bond purchases in 2021. Now when the economic situation is ” considerably stronger” in its own words it is ploughing on. It is plainly afraid of what might happen to US bond yields should it stop buying. Also we get phases when the US Treasury market seems to be struggling which will worry the Fed.


According to President Biden here are the details of his plan.

Biden will make a $2 trillion accelerated investment, with a plan to deploy those resources over his first term, setting us on an irreversible course to meet the ambitious climate progress that science demands.

There are some interesting details here.

Auto Industry: Create 1 million new jobs in the American auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations,

The US has a large auto industry but if you are going to win the new “green” era can you also do this?

And he’ll ensure those workers have good-paying jobs with a choice to join a union. Between 1979 and 2018, American workers have increased their productivity by 70%, while their real wages have only grown by 12% — in large part due to the decline in union density. Biden will reverse this trend, by ensuring that auto workers have jobs with strong labor standards

There are some interesting wages numbers there which lead into an issue I look at regularly. Can we do anything about the real wages issue? If we stick with the US it does have some power which we see often deployed by the Department of Defense buying aircraft from say Boeing giving it not only business but also economies of scale. But will consumers be willing to pay more for US cars when there are cheaper foreign choices? It is not clear to me that there is a “magic wand” here. You can of course become protectionist to help this but if others respond in kind you lose exports.

Also everyone seems to be claiming that they will be the leaders in battery technology and what they call clean energy….

As a final point the bit on railways gives food for thought. This is partly due to where I live. You see Battersea is about to get the London Tube with two new stations where test trains are now being run. The irony is that after a couple of decades of dithering will they have arrived just in time for lower demand for rail travel?


The mood music here is good as the IMF has recently added to.

The United States is projected to return to end-of-2019 activity levels in the first half of 2021

They have revised expected economic growth up to 6.4% for 2021. Care is needed in terms of the detail as they have a poor track record but the theme here is of a US economy surging forwards. But there are problems as we look around because the US Federal Reserve is pumping up house prices at an annual rate of around 10% meaning we get policies like this.

Housing: Spur the construction of 1.5 million sustainable homes and housing units.

Maybe that will help at the margin.

Still I wish President Biden well in his efforts to raise real wages. After all people will need them to pay for the energy prices his policies will create.


The amount of cash around continues to rise contrary to what we keep being told

Over the weekend I spotted a rather curious claim circulating via Bloomberg.

What happens if the Internet goes dark and we can’t use our phones or cards? We may have a solution to one of the biggest nightmares of an increasingly cashless world

This is a rather odd thing to say and as I shall explain it is simply not true. Actually we then find old that for world they really meant Sweden.

In doing so, the startup may have figured out how to help societies function without cash, even “if the lights go out,” which Sweden’s central bank Governor Stefan Ingves once mused would require a return to bank notes and coins………..The Bank for International Settlements has dubbed Sweden the world’s most cashless society. The virtual disappearance of cash in Sweden has spurred a fever of innovation within digital payments, including by the Riksbank itself. Along with China, Sweden leads major economies in developing a central bank digital currency. ( Bloomberg)

I am pointing this out because we have in fact seen quite a surge in the amount of cash in terms of notes and coins being around. Even the ECB pointed this out last week and the emphasis is theirs.

The growth in circulation of euro banknotes has been strong since they were introduced, even when considering the ratio of euro banknotes to GDP, or to the broad monetary aggregate M3.[3] This growth in circulation has intensified during the coronavirus (COVID-19) pandemic. At the end of 2020, the value of euro banknotes in circulation amounted to €1,435 billion, increasing by 11% from €1,293 billion in 2019 (Chart 1). Due to the COVID-19 pandemic, this annual growth rate was exceptionally high when compared with previous years (5% annual growth in the past 10 years on average). The only time the growth rate was higher was during the months following the Lehman Brothers collapse in September 2008.

As you can see reality is somewhat different to what we are regularly told and the ECB puts it like this.

A phenomenon referred to as the “paradox of banknotes”[1] has been observed in the euro area; in recent years, the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased.

This morning the Bank of England has confirmed the data for the UK and you have to drill though the numbers for it. But when you do you see that cash in circulation rose by 1.4% in February and is up some 13.1% on a year ago. Actually the last 3 months have an annualised growth rate of 18.1% So we see that reality is very different to what we keep being told. The amount of cash is £93.76 billion and since the end of April last year when it was £83 billion it has been on quite a tear. Also whilst there had been some plateauing for a couple of years or so the credit crunch has seen quite a rise overall too as the amount was £58.17 billion at the beginning of 2011.

That cashless world has rather lost its lustre hasn’t it?


Looking at the numbers above there looks like there is a correlation between QE and the rise in the amount of cash in circulation. In economics many things correlate without a real link but in this case it has reduced the price of holding cash in terms of interest-rates especially if we add in the associated Bank Rate cuts. So there is some logic to it.

Bank Deposits

We find that what is the nearest thing to cash has been surging as well according to the Bank of England.

Households’ flows into deposit-like accounts remained strong in February. The net flow of deposits remained strong at £17.1 billion, compared to the monthly average of £15.0 billion since March 2020.

This has been complicated by what has been happening at the state bank if I may put it like that but the picture remains the same.

There was a small withdrawal (£1.4 billion) from National Savings and Investment (NS&I) accounts in February, which are not captured within household deposits but can act as a substitute for them. The combined flow into both deposits and NS&I accounts in February (£15.8 billion) was similar to January but remained well above the monthly average of £5.6 billion in the six months to February 2020.

This is a reflection of the larger amount of savings we have been reporting although the returns are somewhat thin.

The effective interest rate paid on individuals’ new time deposits with banks fell to 0.34%, a new series low since the series began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.48%, respectively. The rate on the stock of sight deposits remains the lowest since the series began.

I wish they would stop meddling with the series as it inhibits longer-term comparisons. But as it stands it gives us a two-way swing. Because 0.34% is not much but then these days the concept of interest has been given a good shove lower and if we look to Europe we see much of it with negative ones although that still has mostly been kept away from the ordinary depositor.

Consumer Credit

This by contrast has had a simply dreadful pandemic and the beat goes on.

Individuals continued making net repayments of consumer credit in February (£1.2 billion). This is a slightly smaller net repayment than the average of £1.8 billion since March 2020 (Chart 2). As a result of the further repayment, the annual growth rate fell to -9.9%, a new series low since it began in 1994.

This is something that will have caused indigestion at the Bank of England. Policy had previously been to pump this up via the Funding for Lending and Term Funding Schemes getting the total up to around £220 billion as opposed to the £197.3 billion we now see. As to the detail there is this.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.9 billion) with some repayments of other forms of consumer credit (£0.3 billion). The annual growth rates of both components fell further, to -21.0% and -4.8%, respectively. Both represent new series lows.

As you can see the main mover has been credit card debt presumably because of the cost of it.

Rates on new personal loans to individuals fell to 5.16% and remain low compared to an interest rate of 7.03% in January 2020. The cost of credit card borrowing rose by 15 basis points to 18.18% in February, the highest since May 2020.


We keep being told that cash is dead but that is because the media only look at one part of it. The situation is in fact much more complex with in fact in terms of amounts if not being king it is like this.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, ooh
(Dirty cash, dirty cash) ( Stevie V)

Something else has been on the rise and it is due to the work of the present Bank of England Governor Andrew Bailey when he was in charge of the Financial Conduct. The overdraft interest-rate is now 33% as opposed to the below 20% it was when he tried to reduce it. Yes you did read that right.

Speaking of interest-rates there is one set that seems to be following the changes we have been noting in bond yields and it will concern the Bank of England.

The ‘effective’ rate – the actual interest rates paid – on newly drawn mortgages rose 6 basis points to 1.91% in February. That is slightly higher than the rate in January 2020 (1.85%), and compares with a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained at series low (2.09%)


It is house price pumping season in the UK yet again

The weekend brought some familiar economic news from the UK which has had a familiar effect.

UK homebuilders (Persimmon, Taylor Wimpey, Barratt) at top of FTSE 100 today +5% ahead of #UKBudget and reports of a new mortgage grtee scheme ( @CNBCJou )

The Financial Times took a slightly different tack and left us wondering if it was long property in Chiswick?

The average property price in London’s Chiswick passed £1m last year – An amalgamation of four ancient villages by the Thames, Chiswick is an affluent suburb whose Victorian and Edwardian houses attract those looking for green spaces and a laid-back feel:

Although in Twitter things were not going so well as the only reply so far was “Time to move out!” Oh well.

If we switch to the BBC then there is a distinct feeling of Deja Vu.

A mortgage guarantee scheme to help people with small deposits get on the property ladder is set to be announced at next week’s Budget.

The government will offer incentives to lenders, bringing back 95% mortgages which have “virtually disappeared” during the pandemic, the Treasury says.

There is a curiosity here because they “virtually disappeared” for a couple of reasons. One of them was the rhetoric of politicians after the credit crunch when they assured us that low deposit mortgages would not be allowed to happen again. Also remember this?

The BoE’s Financial Policy Committee said that from October, it would only allow 15 percent of new mortgages to be at multiples higher than 4.5 times a borrower’s income, and that all lending would be subject to extra affordability checks. ( Reuters )

I recall a period a few years ago when there were plenty on social media trumpeting the way that such macroprudential policies could be used to control the housing market. In some cases victory was apparently at the tops of their fingers. Whereas the reality is that with house prices increasing at an annual rate of 8.5% they are doing this.

The coronavirus pandemic has meant there are now few low-deposit mortgages available, the Treasury said, with just eight on the market in January.

They are often seen as riskier by banks as they are more vulnerable to negative changes in property prices – meaning people hold more debt than their home is worth.

Under the scheme, which will launch across the UK in April, the government will offer to take on some of this risk. ( BBC)

So the way we will reduce risk is by taking it ourselves! It is hard not to laugh as the very concept of what was trumpeted as a new policy for house price control is shown to be a sham. The Financial Policy Committee was a PR exercise which simply increases the control of the state as it can hand out more sinecures. Just to rub it in some will claim it is independent. Maybe they are hoping for a job.

Today’s Figures

If we now move onto this morning’s release one might reasonably wonder why the market needs more support?

The mortgage market remained relatively strong in January. Individuals borrowed an additional £5.2 billion secured on their homes, compared to the monthly average of £4.0 billion in the six months to February 2020.

Elsewhere in the release it is called “robust” and in contrast to a recent trend mortgage rates dipped too.

The effective interest rates on newly drawn mortgages fell 5 basis points to 1.85%. That is in line with the rate in January 2020, and compares with a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages fell to 2.09%, a new series low.

If we look further up the chain things appear to be in rude health.

The strength in mortgage borrowing follows a large number of approvals for house purchase. In January, the number of these approvals – an indicator for future lending – was 99,000. While this was a little lower than in December (102,800) it was well above the monthly average in the six months to February 2020 (67,900). Approvals for remortgage (which only capture remortgaging with a different lender) fell slightly to 32,400.

Also there is this floating in the air.

Over the last few months, there has been a growing pressure on the Government to extend the stamp duty holiday and some have even called for the tax to be abolished altogether. ( MoneyFacts)

This was also going to be an issue as it is always much easier to give money away than it is to take it away or stop it. The economic concept here is under the label of Pareto efficiency and estimates are that a “taking away or withdrawal” needs to be about thee times as good as a “give away” . However you look at it there is a lot of pressure to create another cliff edge which is pure can kicking. Putting it another way a clear sign of addiction is fear of withdrawal symptoms.


The release also gives us an insight into savings.

Households’ flows into deposit-like accounts remained strong in January. The net flow of deposits remained strong at £18.5 billion, compared to the monthly average of £4.8 billion in the six months to February 2020.

I will look at the money supply issues later but the point here is that in the UK flows of money have quite a tendency to end up in the housing market.

Unsecured Credit

If the mortgage market is on fire then this area is as cold as ice.

Households’ consumer credit weakened in January with net repayments of £2.4 billion. This compares to an average net repayment of £1.0 billion between September and December 2020 (Chart 1), and was the largest net repayment since May 2020. The decline reflects less new borrowing. As a result, the annual growth rate fell further to -8.9%, a new series low since it began in 1994.

Care is needed as it is an erratic series but on a monthly basis the fall has accelerated here.

In essence it is credit card borrowing which has taken a dive.

Within consumer credit, the weakness on the month primarily reflected net repayments on credit cards (£2.2 billion) with some repayments of other forms of consumer credit (£0.2 billion).

It is expensive.

The cost of credit card borrowing rose by 27 basis points to 18.03% in January.


Some years ago The Whispers summed up the view of the UK establishment regarding house prices.

And the beat goes on
Just like my love everlasting
And the beat goes on
Still moving strong on and on

It seems that even in the recovery phase we need more of this.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me? ( Beatles)

The trouble is that we always need more help in a type of everlasting circle and the reason for that is usually the previous burst of “help”. Although to be fair to The Whispers they had been doing a lot more thinking than central bankers.

Do you ever wonder
That to win, somebody’s got to lose

Let me now link this back to the money supply figures.

Sterling money (known as M4ex) increased by £30.6 billion in January, up from £12.2 billion in December. PNFCs’ holdings of money (on a seasonally adjusted basis) increased by £13.3 billion, up from £1.5 billion in December whilst households’ holdings remained strong with net flow of £18.5 billion.

As I regularly point out this is quite a surge at an annual growth rate which has risen again to 15%. But my purpose today is from another perspective which is that cash in the UK system ( even from some businesses) tends to flow into the housing market and there is a lot of cash about.

In the round it was summed up by Britney.

It’s getting late to give you up
I took a sip from my devil’s cup
Slowly, it’s taking over me
Too high, can’t come down
It’s in the air and it’s all around
Can you feel me now?
With a taste of your lips, I’m on a ride
You’re toxic, I’m slippin’ under



UK mortgage supply surges as consumer credit collapses

Today the economic focus switches to the UK as we consider its share in the pumping up of the world money supply. Although as I type this the central bankers may be rather jealous of the Reddit and Wall Street Bets crew.

Spot silver leapt as much as 7.4% in Asia to $28.99 an ounce, taking gains to about 15% since last Wednesday and the price to its highest since mid August.

Silver mining stocks soared in Australia and China and Money Metals, an online exchange for precious coins and bullion, posted an “EXTREME DEMAND ALERT” banner across its homepage, and announced it restricted orders to between $1,000 and $10,000. ( Reuters)

A more prosaic view on a direct impact of the loose monetary policy in the UK is provided by house prices. Last week Hometrack offered their perspective on this.

The annual rate of UK house price growth is 4.3%, the highest since April 2017. The impetus for growth is coming from Wales, northern England and Scotland where strong demand and attractive affordability allow headroom for above average growth rates.

The rate of annual price inflation is highest in Wales and the North West at +5.4%.

At a city level, Liverpool has jumped to the top of the growth rankings with house prices rising by 6.3% over the last 12 months – this is the highest annual growth rate for 15 years.

Manchester is close behind with a growth rate of +6.0%, back to levels of inflation last seen 2 years ago.

So Liverpool is leading the way as the house price market follows the performance its football team, or at least the red version. Next comes Manchester which may be seeing the benefit of all the plugging of its house prices by the Salford based BBC. Care is needed though because at £127,200 prices in Liverpool are a long way short of the average for this index which is £233,700 and less than half of the twenty city index at £260.500.

This time around things are being led by the North it would seem.

House price growth is at a decade high across three regions – North East, North West, Yorkshire and the Humber – in fact growth is running at the highest since before the global financial crisis.

Although looking ahead they expect all areas to continue this trend.

Despite the new lockdown, demand for homes has posted the usual seasonal rebound which has been stronger than last year. Demand for homes is up 13% on this time last year, with new sales agreed also up 8%.

This rebound is broadly uniform across all regions and countries. It is a continuation of above average demand and market activity from 2020 H2.

You may not be surprised to read that they seem to be keen on an extension to the Stamp Duty holiday. They say it will be short but we know what that invariably means!

Meanwhile something slightly different is happening in London.

The one area where supply is growing is London with flats accounting for much of this increase.

We believe this is a combination of 1) more owners looking to trade up from flats to houses motivated by a desire for space and more flexible working patterns; 2) investors looking to sell homes in the face of falling rents and expectations of an increase in capital gains tax rates in 2021.

Those of you who follow the debate might think that for once the official obsession with using Imputed Rents might show something useful here.They might if they did not use last year’s.So next year they will be useful for telling us what is happening now!

Mortgage Supply

It was on a bit of a tear in December.

Net mortgage borrowing remained strong at £5.6 billion in December.

2020 was a year of not far off the football image of two halves with a strong ending.

Net borrowing continued to be significantly higher than the average of £3.9 billion seen in the six months to February 2020. Strength since September in net mortgage borrowing has, however, only partially offset weakness earlier in the year: total borrowing in 2020 (£43.3 billion) was below 2019 (£48.1 billion).

If we look further up the chain we can expect more of the same.

The strength in mortgage borrowing follows a large number of approvals for house purchase over the second half of 2020. In December, the number of these approvals – an indicator for future lending – was 103,400 (Chart 1). This was slightly lower than in November (105,300) but well above the February level (73,400). Recent strength in approvals has more than offset the significant weakness earlier in the year

The next statement is not for the nervous as what happened after 2007?

House purchase approvals – having troughed at a record low of 9,400 in May – totaled 818,500 in 2020, the largest number in one year since 2007.

These are extraordinary numbers in a pandemic which has ravaged more than a few bits of the UK economy. For example there was more woe being reported for the retail sector earlier via Arcadia. This is a clear function of the way the Bank of England stepped in.

However there is an area where it is now beginning to struggle.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 7 basis points to 1.90% in December. That is slightly above the rate at the start of the year (1.85% in January) and the highest since October 2019. The rate on the outstanding stock of mortgages was little changed at 2.12% in December.

The fact that mortgage rates are not higher than pre pandemic confirms my theme that Bank Rate is essentially now irrelevant for them. After all it was cut from 0.75% to 0.1% and now mortgage rates are in general higher. Indeed it has had little lasting effect even on the shrinking number of variable rate mortgages as their interest is 0.11% lower than a tear ago or around one sixth of the Bank Rate cut.

Consumer Credit

This had a simply wretched 2020 and I do envy the individual who had to announce these numbers at the Bank of England morning meeting.

Households’ consumer credit remained weak in December with net repayments of £1.0 billion. This follows a net repayment of £1.5 billion in November (Chart 2). Total net repayments were £16.6 billion in 2020, the weakest in one year on record. As a result, the annual growth rate fell further to -7.5% in December, a new series low since it began in 1994.

It has essentially been driven by credit cards.

Within consumer credit, the weakness in December reflected net repayments on both credit cards (£0.8 billion) and other forms of consumer credit (£0.1 billion). As a result, the annual growth rates of both components fell further, to -16.2% and -3.4%, respectively. For credit cards, this represents a new series low.

I would say this was due to the cost of borrowing on a credit card but in fact that has pretty much ignored all the Bank Rate cuts of the credit crunch era.

The cost of credit card borrowing bounced back to 17.76% in December, following the series low at 17.49% in November.


There are some extraordinary numbers here as we see the impact of the £128 billion or so of the various Term Funding Schemes on mortgage supply. Next comes the impact of the extra QE bond buying in driving mortgage interest-rates lower although even a current weekly purchasing rate of just over £4.4 billion has not stopped a bounce back.

Switching to the wider money supply we see changes as mortgage finance fires up again but consumer credit shrinks. On the other side of the coin we have seen an extraordinary rise in savings.

Households’ flows in to deposit-like accounts rose in December. The net flow of deposits was £20.9 billion in December, up from £18.4 billion in November (Chart 3).

There is an irony here as the TFS was to avoid the banks having to compete for deposits which have poured in anyone. I am also sure some bright spark PhD is writing a piece saying that lower savings rates create a higher demand for savings.

The effective interest rate paid on individuals’ new time deposits with banks fell by 8 basis points in December, to 0.42%, a new series low since it began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.51%, respectively. The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in January.

With mortgage rates rising and savings rates falling The Precious! The Precious! Will be making some money and is no doubt a factor in why bank share prices have been doing better.

Adding it all up gives us money supply growth of 14.1%.





UK interest-rates are rising in spite of another money supply surge

Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).

London’s average house prices hit a record high of £496,000 in September 2020.

These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.

As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.

“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”

You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).

Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.

If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.

Pump It Up!

This is the change seen in October.

Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.

The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.

There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.

This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.


Let me now switch to the part that will be emphasised at the Bank of England morning meeting.

The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.

Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.

The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.

However the road to the fast track promotion scheme will mean relegating this part to the small print.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,

Perhaps our junior could emphasise this part.

 but remain below the rate at the start of the year (1.85% in January).

Consumer Credit

This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.

Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.

A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.

Small Business Lending

For once these numbers look good.

Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .

Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.


The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.

Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.

Also there is this.

 Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.

So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.

The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.


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?


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.


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 will be very worried about the weakness in consumer credit

This afternoon will see yet another bond buying operation from the Bank of England as another £1.473 billion is purchased. Tuesday is what I call heavy-duty QE ( Quantitative Easing) as it purchases longer dated maturities and indeed regularly buys what are called ultra longs as the maturities in the UK bond or Gilt market go out as far as 2071. That length of purchase is unusual as for example the ECB only purchases out to 30 years so 2050 at the moment. This adds to the £1.473 billion bought yesterday and it will be the same tomorrow as the week in this regard ends early.

I get asked regularly how they pay for this? In line with today’s theme the money is created by the Bank of England which then uses it to buy the bonds. Thus the money supply is increased and this week it will be increased by just over £4.4 billion from this route. In one sense this is a pure profit for the Bank of England and is what is called seigniorage except in the past it was the profit on issuing actual notes and coins whereas now it is electronic and thus costs very little.

There is a nice little earner for the Bank of England as it charges Bank Rate on this to the Special Purpose Vehicle set up to hold the bonds so ironically cutting it to 0.1% reduces its profit on this. You can see that the accounting method and I stress this is simply an accounting method did not think negative interest-rates were going to happen as they will be booking a loss in that eventuality!

So the money supply has been expanded via this route by £672 billion in total or in the recent phase £237 billion as of the end of last week. This goes into the narrow money supply which used to be called “high powered money”. I point that out because in the credit crunch era it has proved to be anything but that because as they have pumped up the money supply the usage of it it what is called Velocity has fallen. In fact Velocity has at times fallen faster than the money supply has risen but  central banks turn a Nelsonian blind eye to that reality. They are consistent in preferring theory to reality.

There will have been smaller influences on the money supply from the purchases of Corporate Bonds ( £19 billion) and the Covid Corporate Financing Faciity ( £16.4 billion). However not all the CCFF will count as an increase in the money supply as some of the commercial paper bought will already be counted.

Today’s Data

This will have caused angst at the Bank of England and you will quickly see why.

Overall, private sector companies and households reduced their holdings of money in August, following 5 months of unusually strong deposit flows. Sterling money (known as M4ex) fell by £0.9 billion in August, down from an increase of £25.6 billion in July.

The private sector made a net repayment of loans in August. Sterling net lending to private sector companies and households, or M4Lex, was -£3.9 billion, following a net repayment of £0.5 billion in July.

Yes that is a fall and may be the reason we have had more hints from the Bank of England about negative interest-rates. It found itself “pushing on a string” in August where it was pumping up the narrow measure of the money supply by around £20 billion or so, But we and by this I mean as individuals and businesses had less demand for money and in fact so much less demand that the total fell. Actually in terms of the specifics it was the financial sector other than banks which drove the fall as what were presumably pension funds and insurance companies wanted £6.1 billion less.

In fact monthly money supply numbers are very erratic so it is better to take July and August together where we see the money supply rose by £25 billion which is still less than the Bank of England narrow money push. Just to complete the set we have what looks like another fall in Velocity or as I prefer to put it a fall in money demand. This is a little awkward as for broad money we are discussing money demand when it is called money supply. A loan only exists when someone or thing asks for it and is approved.

Unsecured Credit

This will also have unsettled the Bank of England.

Net consumer credit borrowing remained positive in August at £0.3 billion. This was a little weaker than borrowing of £1.1 billion in July, which was in line with the average net flow in the 18 months to February 2020. These increases followed net repayments of £3.9 billion per month, on average, between March and June. The annual growth rate fell slightly to -3.9%, down from -3.7% in July: this was a new series low since it began in 1994.

I mean with borrowing of this sort so low how will the banks make a profit! More seriously there is a hint of consumers battening down the hatches from the repayment numbers.

Gross borrowing was £21.3 billion, up from £20.9 billion in July and compared to an average of £25.5 billion in the six months to February 2020. Repayments increased to £20.6 billion from £19.6 billion in July.

In terms of a breakdown in the borrowing it was pretty even this month but as you can see below the pandemic decline has essentially been a credit card thing.

Net borrowing on credit cards was £0.2 billion in August (down from £0.6 billion), while net borrowing of other forms of consumer credit was £0.1 billion, down from £0.5 billion in July. The annual growth rates both remained negative, at -10.4% and -0.9% respectively.


Whoever had the job of presenting the Bank of England morning meeting will have been wise to have started with these numbers today. After all the Governor may have a short attention span and may remember him or her favourably.

The mortgage market continued to show more signs of recovery in August. On net, households borrowed an additional £3.1 billion secured on their homes, following borrowing of £2.9 billion in July. Mortgage borrowing troughed at £0.5 billion in April, and is still a little below the average of £4.2 billion in the six months to February 2020.

A career enhancing vibe can be continued by emphasising this.

The number of mortgage approvals for house purchase continued increasing sharply in August, to 84,700 from 66,300 in July . This was the highest number of approvals since October 2007.

Whilst relegating the next bit to when a liveried bar(wo)man is refreshing the Governor’s coffee cup and thereby distracting him.

 but it only partially offsets weakness seen between March and June. In total, there have been 418,000 approvals in 2020, compared with 524,000 in the same period in 2019.


Today’s money supply data has highlighted a few issues. The opener is that official efforts to raise or reduce the money supply pretty much have to work on the narrow money supply ( we are in an even worse mess if they do not). However by the time we reach broad money other agents are involved such as us and companies and there central banks can find themselves pushing on a string. What they really want to influence is money demand and they will be cheered by the mortgage numbers but worried by the overall ones as well as the consumer or unsecured credit ones.

To make things (hopefully) clearer I have left out the government influence via selling Gilts for cash which depresses the money supply as well as spending more than it receives which expands it. One way of looking at the Bank of England action is offsetting much of the former which we normally look at in terms of keeping bond or Gilt yields low and in some cases negative.

Quite often the law of unintended consequences applies to looking at the money supply as we have 2 issues.

  1. The numbers if we pick out causative factors do not add up to what we think they should be.
  2. The leads and lags in the effect of any changes are quite variable.

The concept of unintended consequences will be on the mind of Governor Andrew Bailey today because when he was head of the FCA he acted to REDUCE overdraft rates and you will see why I have put that in capitals as you observe below what actually has been happening.

The ‘effective’ rate – the actual interest rate paid – on interest-charging overdrafts rose by 4.2 percentage points to 19.00% in August. 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.

Also Silvana Tenreyro is not having a good day as we recall her claim that bank profitability is not affected by negative interest-rates. Tell that to HSBC which is selling a theoretically strong holding for a loss…

In another sign that corporate and retail banking perform well in a negative rate environment, Reuters report that HSBC is about to sell its French biz (formerly CCF) for the hefty price of -500M€. Yes, there is a “-” sign. The book value is +8443m€. (That’s a “+” sign) ( @jeuasommenulle )

Can the Bank of England pull UK house prices out of the bag again?

Whilst the UK was winding up for a long weekend the Governor of the Bank of England was speaking about his plans for QE ( Quantitative Easing) at the Jackson Hole conference. He said some pretty extraordinary stuff in a somewhat stuttering performance via videolink. Apparently it has been a triumph.

So what is our latest thinking on the effects of QE and how it works? Viewed from the depth of the Covid
crisis, QE worked effectively.

Although as he cannot measure it so we will have to take his word for it.

Measuring this effect precisely is of course hard, since we cannot easily identify what the counterfactual would have been in the absence of QE.

He seems to have forgotten the impact of the central bank foreign exchange liquidity swaps of the US Federal Reserve. By contrast we were on the pace back on the 16th of March.

But QE clearly acted to break a dangerous risk of transmission from severe market stress to the macro-economy, by avoiding a sharp tightening in financial conditions and thus an increase in effective interest rates.

The next bit was even odder and I have highlighted the especially significant part.

QE is normally thought to work through a number of channels: including signalling of future central bank
intentions and thus interest rates; so called ‘portfolio balance’ effects (i.e. by changing the composition of
assets held by the private sector); and improving impaired market liquidity.

As he has cut to what he argues is the “lower bound” for UK interest-rates how can he be signalling lower ones? After all that would take us to the negative interest-rates he denies any plans for.

Fantasy Time

Things then took something of an Alice In Wonderland turn. Before you read this next bit let me remind you that the Bank of England started QE back in 2009 and not one single £ has ever been repaid.

First, a balance sheet intervention aimed solely at market
functioning is likely to be more temporary, in terms of the duration of its need to be in place.

Also the previous plan if I credit it with being a plan was waiting for this.

and once the Bank Rate
had risen to around 1.5%, thus creating more headroom for the future use of Bank Rate both up and down.

Whilst it was none too bright ( as you force the price of the Gilts held down before selling them) it was never going to be used. This was clear from the way Nemat Shafik was put in charge of this as you would never give her that important a job. Even the Bank of England eventually had to face up to her competence and she left her role early to run the LSE. This meant that she was part of the “woman overboard” problem that so dogged the previous Governor Mark Carney.

The new plan for any QE unwind is below.

We need to work through what lessons this may have for the appropriate future path of central bank balance sheets, including the pace and timing of any future unwind of asset

How very Cheshire Cat.

“Alice asked the Cheshire Cat, who was sitting in a tree, “What road do I take?”

The cat asked, “Where do you want to go?”

“I don’t know,” Alice answered.

“Then,” said the cat, “it really doesn’t matter, does it?”

The only real interest the Governor has here is in doing more QE and he faces a potential limit ( if we did not know that we learn it from his denial). So he thinks that one day he may unwind some QE so he can do even more later. For the moment the limit keeps moving higher as highlighted by the fact that the UK issued another £7.4 billion of new bonds or Gilts last week alone.

Today’s Monetary Data

Let me highlight this referring to the Governor’s speech. He tells us that QE has been successful.

The Covid crisis to date has demonstrated that QE and forward guidance around it have been effective in a
particular situation.

Meanwhile borrowers faced HIGHER and not LOWER interest-rates in July

The interest rate on new consumer credit borrowing increased 22 basis points to 4.64% in July, while rates on interest-charging overdrafts increased 1.6 percentage points to 14.84%.

This issue is one which is a nagging headache for Governor Bailey this is because he had the same effect in his previous role as head of the Financial Conduct Authority. It investigated unauthorised overdraft rates in such a way they have risen from a bit below 20% to 31.63% in July. Some have reported these have doubled so perhaps the data is being tortured here.There is a confession to this if you look hard enough.

Rates on interest-charging overdraft rose by 1.6 percentage points to 14.84% in July. Between April and June, overdraft rates have been revised up by around 5 percentage points due to changes in underlying data.

Oh and just as a reminder the FCA was supposed to be representing the borrowers and not the lenders.


As the Governor trumpets his “to “go big” and “go fast” decisively” action we see a clear consequence below.

Private sector companies and households continued increasing deposits with banks at a fast pace in July. Sterling money (known as M4ex) rose by £26.3 billion in July, more than in June (£16.8 billion), but less than average monthly increase of £53.4 billion between March and May. The increase in July is strong relative to the £9.4 billion average of the six months to February 2020.

This means that annual broad money growth ( M4) is at a record of 12.4%. Care is needed as I can recall a previous measure ( £M3) so the history is shorter than you might think. But there has been a concerted effort by the Bank of England to sing along with Andrea True Connection.

(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?

Or perhaps Britney Spears.

Gimme, gimme more
Gimme more
Gimme, gimme more
Gimme, gimme more
Gimme more

Consumer Credit

The sighs of relief out of the Bank of England were audible when this was released.

Net consumer credit borrowing was positive in July, following four months of net repayments (Chart 2). An additional £1.2 billion of consumer credit was borrowed in July, around the average of £1.1 billion per month in the 18 months to February 2020.

Although there is still this to send a chill down its spine.

 Net repayments totaled £15.9 billion between March and June. That recent weakness meant the annual growth rate remained negative at -3.6%, similar to June and it remains the weakest since the series began in 1994.


Quite a few of my themes have been in play today. For example QE looks ever more like a “To Infinity! And Beyond!” play. Governor Bailey confirms this by repeating the plan for interest-rates. They were only ever raised ( and by a mere 0.25% net in reality) so they could cut them later. So QE will only ever be reduced ( so far net progress is £0) so that they can do more later. He does not mention it but any official interest-rate increase looks way in the distance although as we have noticed the real world does see them. That was my first ever theme on here.

Next let me address the money supply growth. The theory is that it will in around 2 years time boost nominal GDP by the same amount. We therefore will see both inflation and growth. That works in broad terms but we have learnt in the past that the growth/inflation split is unknown as are the lags. Also of course which GDP level do we start from? I can see PhD’s at the Bank of England sniffing the chance to produce career enhancing research but for the rest of us we can merely say we expect inflation but much of it may end up here.

House prices at the end of the year are expected to be 2% to 3% higher than at the start.

The annual rate of UK house price growth slowed to 2.5% in July, from 2.7% in June. ( Zoopla )

I find that a little mind boggling but unlike central banking research we look at reality on here.

Finally let me cover something omitted by the Governor and many other places. This is the strength of the UK Pound £ which has risen above US $1.34. Whilst US Dollar weakness is a factor it is also now above 142 Yen ( and the Yen has been strong itself). I would place a quote from the media if I could find any. In trade-weighted terms from the nadir just below 73 as the crisis hit it will be around 79 at these levels. Or if you prefer the equivalent according to the old Bank of England rule of thumb is a 1.5% rise in Bank Rate. Perhaps nobody has told the Governor about this…..