Will the new Bank of England Governor cut interest-rates like in Yes Prime Minister?

Today has brought something I have long warned about into focus. This is the so-called improvement made by Bank of England Governor Mark Carney where it votes on a Wednesday evening but does not announce the results until midday on a Thursday. With it being a leaky vessel there was an enhanced risk of an early wire for some.

The City watchdog is to investigate a jump in the pound which took place shortly before the Bank of England’s interest rate announcement on Thursday.

The rise has raised questions over whether the decision to hold the Bank’s base rate at 0.75% had been leaked.

The Financial Conduct Authority (FCA) said: “We are aware of the incident and are looking into it.”

In December, the Bank referred to the FCA a leak of an audio feed of sensitive information to traders.

The value of sterling increased about 15 seconds before midday on Thursday, when the Bank’s Monetary Policy Committee (MPC) made its announcement.

It rose from $1.3023 to $1.3089 against the dollar, and saw a similar increase against the euro.

( BBC )

Actually the Pound had been rallying from much earlier in the morning but perhaps the FCA was not up then. As to the enquiry we know from the TV series Yes Minister how they work.

That’s what leak enquiries are for.
Setting up.
They don’t actually conduct them.

In fact it gets better.

Members may be appointed, but they’ll never meet, and certainly never report.
How many leak enquiries can you recall that named the culprit? – In round figures.
– If you want it in round figures none.

For those of you who have never watched this series it described the UK system of government with both uncanny accuracy and humour. This week alone we saw the Chancellor call for expenditure cuts of 5% exactly as predicted. They will be promised and claimed but somehow wont actually happen if the series continues to be so prescient.

Press Conference

This was a classic Unreliable Boyfriend style performance proving that the Governor has not lost his touch. After hinting and not delivering an interest-rate cut he then in yet another innovation the Monetary Policy Report ( just like in Canada ) cut the expected economic growth rate.

Taken together, potential supply growth is projected to remain subdued, and weaker than expected a year ago.
The MPC judges that potential supply growth will remain subdued over the forecast period, at around 1% on average.
It initially falls a little from its current rate of around 1%, before rising to around 1½% in 2023 Q1.

The problem here was exposed by a good question from the economics editor of the Financial Times Chris Giles who asked why this had fallen so much in Governor Carney’s period of office? You always have an indicator of a hot potato when the question is quickly passed to a Deputy Governor. As ever the absent-minded professor Ben Broadbent waffled inconsequentially as he waited for the audience to lose the will to live. But there are clear underling issues here. The recent one is the fall in the speed limit form 1.5%  to 1% as implied here but as Chris highlighted it had already nearly halved. What Chris did not highlight but I will is the impact on this of the woeful “output gap” style thinking which I will illustrate by reminding you that the Governor originally highlighted an unemployment rate of 7% and now in the MPR we are told this.

The MPC judges that the long-term equilibrium unemployment rate has remained at around 4¼%

That is a Boeing 737 Max style error.

Today’s Data

It is hard not to recall Governor Carney tell us “this is not a debt-fuelled recovery” as you read the numbers below.

The extra amount borrowed by consumers in order to buy goods and services increased to £1.2 billion in December, in line with the £1.1 billion average seen since July 2018. Within this, net borrowing on credit cards recovered from a very weak November to £0.4 billion. Net borrowing for other loans and advances remained the same as in November, at £0.8 billion.

As you can see we are little the wiser as to why credit card spending fell in the way in did in the previous release ( November data). It may just be one of those things because the surrounding months were relatively strong a bit like we often see with the UK pharmaceutical sector which does not run in even months.

A consequence of this is below.

The annual growth rate of consumer credit rose to 6.1% in December, having ticked down to 5.9% in November. The growth rate for consumer credit has been close to this level since May 2019. Prior to this it had fallen steadily from an average of 10.3% in 2017.

So after rocketing it is merely rising very strongly! From. of course, a higher base. Can anybody think of anything else in the UK economy rising at this sort of rate? It is six times the rate at which the Bank of England now thinks the economy can grow at and around double wages growth.

Actually household consumption full stop picked up.

Net mortgage borrowing by households was £4.6 billion in December, above the £4.2 billion average seen over the past six months. Despite these stronger flows, the annual growth rate for mortgage borrowing remained at 3.4%. Mortgage approvals for house purchase (an indicator for future lending) also picked up in December, to 67,200, above the 65,900 average of the past six months. Approvals for remortgage rose slightly on the month to 49,700.

For newer readers this continues a trend started by the Funding for Lending Scheme which began in the summer of 2012. It took a year to turn net mortgage lending positive but over time this example of credit easing has had the effect you see above. Of course in true Yes Minister style it was badged as a policy to boost small business lending, how is that going?

Within this, the growth rate of borrowing from large businesses and SMEs fell to 4.4% and 0.8% respectively.

Actually and you have to dig into the detail to find this for some reason, smaller business borrowed an extra 0 in December which followed an extra 0 in November.

Comment

The last 24 hours have been an example of the UK deep-state in action. For example the ground was set for the new Bank of England Governor Andrew Bailey to reward the government with an interest-rate cut in return for his appointment just like in Yes Prime Minister. Meanwhile as head of the FCA he can make sure that the leak enquiry into the current Governor does not impact in his own term in a sort of insider regulation response to possible insider trading.

Meanwhile the new Governor has already lived down to his reputation for competence.

The Financial Conduct Authority (FCA) said most High Street banks had set “very similar prices”, after it demanded changes to the system.

Several big brands including Santander, Lloyds Banking Group and HSBC are set to bring in a 39.9% rate this year.

The FCA has sent a letter to banks, asking them to explain what influenced their decision.

The City regulator has also asked how the banks will deal with any customers who could be worse off following the changes.

Yep the reforms of the FCA have more than doubled overdraft rates for some. Today’s Bank of England release has picked up a bit of this as its quoted rate is now 20.69% adding to something that I have reported throughout the life of this blog. Official interest-rates may fall but some real world ones have risen.

So as we consider Bank of England Governors let me leave you with one of the finest from the Who.

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!
We don’t get fooled again

 

 

 

The Bank of England has a credit card problem

This morning has brought a development in two areas which are of high interest to us. So let us crack on with this from the Financial Times.

The Bank of England has issued a warning about the sort of risky lending practices particularly important to Virgin Money, at a critical time in the bank’s negotiations over a £1.6bn takeover by rival CYBG.

When one reads about risky lending it is hard not to think about the surge in unsecured consumer lending in the UK over the past couple of years or so.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March ( Bank of England)

That rate of growth was described a couple of months ago as “weak” by Sir Dave Ramsden. Apparently such analysis qualifies you to be a Deputy Governor these days and even gets you a Knighthood. Also if 8% is weak I wonder what he thinks of inflation at 2/3%?

However the thought that the Bank of England is worried about the consumer fades somewhat as we note that yet again the “precious” seems to be the priority.

In a letter sent to bank chiefs last week seen by the FT, the Prudential Regulation Authority, BoE’s supervisor of the largest banks and insurers, said “a small number of firms” were vulnerable to sudden losses if customers on zero per cent interest credit card offers then leave earlier or borrow less than expected.

How might losses happen?

Melanie Beaman, PRA director for UK deposit takers, wrote that banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.

The word effective makes me nervous so what does it mean?

EIR allows lenders that offer products with temporary interest-free periods to book in advance some of the revenues they expect to receive once the introductory period ends.

That sounds rather like Enron doesn’t it? I also recall a computer leasing firm in the UK that went bust after operating a scheme where future revenues were booked as present ones and costs were like that poor battered can. Anyway there is a rather good reply to this on the FT website.

I am expecting to win the lottery. Can l  bank the anticipated income now please?  ( TRIMONTIUM)

There is more.

Optimistic assumptions about factors such as customer retention rates and future borrowing levels allow banks to report higher incomes, but increase the risk of valuation errors that could lead to a reversal and weaken their balance sheets, according to the PRA.

Are these the same balance sheets that they keep telling us are not only “resilient” but increasingly so? We seem to be entering into a phase where updating my financial lexicon for these times will be a busy task again. Perhaps “Optimistic” will go in there too?

Moving on one bank in particular seems to have been singed out.

Almost 20 per cent of Virgin Money’s annual net interest income in 2017 came from the EIR method. Industry executives said any perceived threat to capital levels could strengthen CYBG’s (Clydesdale &Yorkshire) hand in negotiations. Virgin Money declined to comment on the PRA’s letter or the merger discussions. CYBG and the PRA also declined to comment.

This is a little awkward as intervening during a takeover/merger raises the spectre of “dirty tricks” and to coin a phrase it would have been “Fa-fa-fa-fa-fa-fa-fa-fa-fa-far better” if they have been more speedy.

FPC

We do not mention this often but let me note this from a speech from Anil Kashyap, Member of the Financial Policy Committee. Do not be embarrassed if you thought “who?” as so did I.

The statute setting up the FPC also makes the committee responsible for taking steps (here I am
paraphrasing) to reduce the risks associated with unsustainable build-ups of debt for households and
businesses. This means that the FPC is obliged to monitor credit developments and if necessary be
prepared to advocate for policies that may lead some borrowers and lenders to change the terms of a deal
that they were otherwise willing to consummate.

Worthy stuff except of course if we move to the MPC and go back to the summer of 2016. This was Chief Economist Andy Haldane in both June and July as he gave essentially the same speech twice.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature
rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption.

Seeing as monetary policy easings in the UK had invariably led to rises in unsecured borrowing you might think the FPC would have been on the case. However Andy was something of a zealot.

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a
collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale
of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be
delivered promptly as well as muscularly.

Not only had Andy completely misread the economic situation the credit taps were turned open. He and the Bank of England would prefer us to forget that they planned even more for November 2016 ( Bank Rate to 0.1% for example) which even they ended up dropping like it was a hot potato.

My point though is that the cause of this below was the Bank of England itself. So if the FPC wanted to stop it then it merely needed to walk to the next committee room.

Consumer credit had been growing particularly rapidly. It had reached an annual growth
rate of 10.9% in November 2016 – the fastest rate of expansion since 2005 – before easing back
somewhat in subsequent months. ( FPC Minutes March 2017)

As some like Governor Carney are on both committees they could have warned themselves about their own behaviour. Instead they act like Alan Pardew when he was manager of Newcastle United.

“I actually thought we contained him (Gareth Bale) quite well.”

He only scored twice…..

Credit Card Interest-Rates

Whilst the Bank of England is concerned about 0% credit card rates albeit for the banks not us. There is also the fact that despite all its interest-rate cuts,QE and credit easing the interest-rate charged on them has risen in the credit crunch era.

Effective rates on the stock of interest-charging credit cards decreased 22bps to 18.26% in April 2018.

I remember when I first looked back in the credit crunch day and it was ~17%.

Comment

You may be wondering after reading the sentence above whether policy has in fact been eased? I say yes on two counts. Firstly it seems to be an area where there is as far as we can tell pretty much inexhaustible demand so the quantity easing of the Bank of England has been a big factor eventually driving volumes back up. Next is a twofold factor on interest-rates which as many of you have commented over the years a lot of credit card borrowing is at 0%. It may well be a loss leader to suck borrowers in but it is the state of play. Next we can only assume that credit card interest-rates would be even higher otherwise although of course we do not know that.

What we do know is that unsecured lending of which credit card lending is a major factor has surged in th last couple of years or so. Accordingly it was a mistake to give the Bank of England control over both the accelerator and the brake.

Me on Core Finance TV

 

What are the problems raised by the unsecured credit boom in the UK?

A feature of the recent economic landscape of the UK has been the rise in unsecured credit which of course raises fears about past problems with it. This morning has seen a new way of looking at the issue and it has been provided by Citizens Advice which for those unaware provides advice on debt and money amongst other things.

Major new research by Citizens Advice finds that nearly 1 in 5 people struggling with debts has had their credit card limit raised without them requesting it -a practice the charity would like to see banned……..The charity’s major new report, Stuck in Debt, reveals that people struggling with long term credit card debt were more likely to have their limit raised. 18% of struggling credit card users had their limit raised in the past year without requesting it, compared to 12% of all credit card holders.

This reads like a chapter of Freakonomics where the bank assumes some of the functions of a drug dealer luring some of its customers in for ever more of their addiction doesn’t it? Citizens Advice does have quite a bit of up to date experience in this area.

Citizens Advice helped nearly 66,000 people with over 140,000 credit card debt problems in the last year.

Also some of the individual instances are shocking although hopefully these are the tip of an iceberg.

One pensioner Citizens Advice helped was repeatedly called by firms offering more credit cards – despite the fact that she could only afford to make minimum repayments on her existing cards. She used the cards to meet her essential bills and ended up with a total of 21 credit cards and debts totaling £70,000…..Another man the charity helped owed £15,000 on four different credit cards, but despite only making minimum repayments on each card which just covered the interest, he was notified by all four providers that they were increasing his credit limit. He turned to Citizens Advice for help when his debts hit £30,000.

Some care is needed here as people have to take at least some responsibility for their actions and the first instance begs the question of why a pensioner needed to borrow to pay essential bills. However there need to be some rules for the lenders as other wise the lenders could lend and lend and lend.

The research also showed that credit card debt led to more problems than personal loans.

People with credit card debts were also more likely to get into long term debt than those with personal loans and were less able to pay their debt down. Only 60% of people struggling with credit card debt were able to reduce it over two years, compared to 72% of people struggling with a personal loan – with credit card borrowers paying off £449 over two years, compared to a drop of £620 for people with personal loans.

This seems to be because the rules for credit card lending are more lax than for personal loans. It is therefore likely that those in the worst circumstances are pushed towards credit card borrowing which is likely to be more expensive as part of a downwards cycle.

The official response

The Financial Conduct Authority will argue it is on the case.

The FCA has announced a range of proposals to help those already in long term credit card debt – who are spending more on credit card interest charges than paying off the total amount they owe.  It says lenders should contact customers who have been in this situation for 3 years to arrange a plan to pay their outstanding balance more quickly.

Do you notice like in the case of Provident Financial that the FCA only ever seems to appear when there is a problem and never seems to be ahead of events?

The Bank of England

It has had a role in pushing unsecured credit growth higher especially if we review these words from its Chief Economist Andy Haldane on the 30th of June last year.

 I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison

He continued in the same vein or perhaps wanted to inject in the same vein.

Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

Back then there was of course a policy move from the Bank of England including a Bank Rate cut, more QE and credit easing via the Term Funding Scheme. It is easy to forget now ( especially) if you listen to the Bank of England but the “Forward Guidance” was for even more easing last November. So if you were a bank you were effectively told that if you went out and lent the Bank of England had your back. As they had already been pushing mortgage lending and business lending is difficult ( I have discussed her many times the failure of efforts in this regard) it was always likely that the lending would spread to other areas. Indeed if you are in the sort of panic Andy was in back then any lending by banks might seem a good idea. On this road unsecured lending by banks and car finance by the manufacturers ( which some think is secured others not so) was likely to rise in what we might call an “unexpected” consequence.

Yes Prime Minister

This excellent television series would of course from time to time involve the apocryphal civil servant Sir Humphrey “solving” a problem he had created in the past. On this road the Bank of England can stoke a boom whilst claiming it is in fact being “vigilant” and then when there is trouble its PR department goes into overdrive pointing out what it is doing to fix the problem. The fact it helped create it gets redacted from the official version of history.

Comment

We are likely to see more of these sort of stories in the months ahead as the issue continues as this morning’s data release from the Bank of England reminds us.

The annual growth rate of consumer credit fell to 9.8%, the lowest since April 2016, as the July flow was a little weaker than recent month.

If we move to credit card lending the annual rate of growth dipped from 9% in June to 8.9% in July which compares to an annual rate of economic growth ( GDP) of 1.7%. Quite a gap isn’t it?! Is it Sledgehammer sized? As to the small and medium-sized business lending we have been promised since the summer of 2013 how is that going?

Loans to small and medium-sized enterprises decreased by £0.2 billion

The Bank of England seems at times rather detached from reality as this below indicates.

How important are good customer relationships to keeping distressed banks stable?

However there may be a little light at the end of the tunnel. We have seen business surveys from the Confederation of British Industry saying manufacturers are exporting well. This has not been matched by the official data until perhaps this morning.

Loans to large non-financial businesses increased by £8.2 billion in July (Table M), with a particularly large increase in the manufacturing sector

Is the J-Curve finally kicking in? Only time will tell.

 

 

UK unsecured credit surges whilst the Bank of England is “vigilant”

There is much to consider about the UK economy right now as we get updated on both economic sentiment and money supply data. Before we narrow down to the UK situation there was an intriguing view on the importance of money supply last night from Madame Le Pen. She seems to be suggesting that the French people as individual’s could switch back to the French France whilst businesses could use the Euro ( she seemed also to confuse the Euro with the Ecu). So how would they be paid wages and at what exchange rate? I guess there would be a boom in shops which do foreign exchange transactions as you could hardly have a fixed exchange rate! Oh well……

Meanwhile on Tuesday there was a meeting to celebrate 20 years of Bank of England independence. It has not got much publicity presumably on the grounds that so many think that there is little to actually celebrate. Even the heavily pro establishment Financial Times reports in such a fashion.

The Bank of England will be sorely tested as the guardian of Britain’s economic and financial stability in another crisis, the architects of the current system have warned.

Indeed there was an implied criticism of the current Governor Mark Carney.

Nick Macpherson, Gordon Brown’s private secretary in 1997 and later the most senior civil servant at the Treasury, said that appointing capable governors was a particular problem.

That sentence is like something I read in Yes Prime Minister 30 years ago as i marvel one more time at its insight and humour. When Sir Frank Gordon is asked about appointing a Governor who is both honest and intelligent he replies.

Although an innovation, it should certainly be tried….

There was also another reverse for Charlotte Hogg ( who apparently has now left rather than working her notice as was the claimed plan and thanks for pointing this out) who you may recall claimed there was no groupthink at the Bank of England.

“There was a terrible tendency towards groupthink,” said Kate Barker, who sat on the bank’s Monetary Policy Committee for nine years. “That the BoE emerged from the crisis with more power I think is very surprising.”

Also this from Rupert Harrison seems to contradict the official view that the FPC is “vigilant”.

Giving the Financial Policy Committee an explicit mandate to secure stability was extremely important, he told the audience: “If there is another financial crisis, we will know who to blame.”

The best reply suggest that the Bank of England may be the cause rather than the solution to the next financial crisis. Ooops!

Would that be the crisis precipitated by the BoE extreme interest rate policy and experimental QE program? ( Neil at Home)

Money Supply

This is something that the Bank of England really gave a shove to last August. We got another £60 billion of UK Gilt purchases, £10 billion of Corporate Bond purchases as well as £57.5 billion so far of the bank subsidy called the Term Funding Scheme. Oh and a cut in Bank Rate below the supposedly emergency level of 0.5%. So what is happening?

Broad money, M4 excluding intermediate other financial corporations, increased by £10.1 billion in March (Table A), with positive flows for all sectors.

This means that it grew by 0.5% on the month and 6.7% on a year before. If we take a broad sweep of the situation the Bank of England increased the annual growth rate from ~4% to ~7%. The old rule of thumb for this is to take GDP growth off this to get an idea of inflationary pressure so if we subtract 2% from that we are left with inflation heading above 4%. The inflation measure used for this was the Retail Price Index which is currently running at an annual rate of increase of 3.1%.

Unsecured credit

This continues on its own merry way as you can see.

The flow of consumer credit was in line with its recent average in March, at £1.6 billion

That is a very neutral way of describing quite a surge is it not? The monthly rate of growth was 0.8% and the annual and 3 monthly growth rates were 10.2%. So we see that the Bank of England has created quite a boom in unsecured credit about which it tells us it is being “vigilant”. In case you are wondering there is now some £197.4 billion of it.

In terms of a break down we see that credit card debt is rising at an annual rate of 8.6% with other loans and advances growing at 11%. For comparison purposes let us remind ourselves of real wage growth which is now around 0% and GDP or economic growth which is around 2%.

Looking at it another way I have written many times about the impact of easy UK monetary policy on mortgage lending. If we look back to the start of the Funding for Lending Scheme then the  annual growth rate of the “other loans and advances” part of unsecured credit was  3% as opposed to the current 11%.

Mortgage lending

It took a fair bit of effort but the Bank of England finally got net mortgage lending positive and now here is the state of play.

Lending secured on dwellings rose by £3.1 billion in March, similar to the recent average

It would be higher but the net figure is reduced by the scale of monthly repayments which are usually of the order of £17 billion.

Comment

There is much to consider here as we see that the UK monetary taps remain wide open. In the past the usual response to this is a combination of higher inflation and often a lower exchange-rate. Sounds familiar doesn’t it? The exact situation for the value of the UK Pound £ is complex because of course there are international influences as well as the vote last June. Also movements tend to happen before a policy move as they move on expectations of it so all measurements are awkward in terms of precision.

Also there is the issue of increased indebtedness at a time of real wage stagnation. On that road they are in the “spiders web” sung about by Coldplay in the song aptly named Trouble  as how can they increase interest-rates on any scale now? If we move to growth it would appear that the UK economy has regained some momentum in the second quarter if the Markit business survey is accurate.

UK service providers experienced a sustained rebound in business activity during April, supported by the fastest upturn in new work so far in 2017…….“The upturn in the services PMI rounds off a hattrick of good news after upside surprises to both the manufacturing and construction PMIs. The three surveys collectively point to GDP growing at a rate of 0.6% at the start of the second quarter.

The Bank of England will try to bask in the credit for this but the truth is that it maybe added a little to the powerful effect of the lower UK Pound £ that was already in place but at the cost of this.

The PMI surveys also show average prices charged for goods and services rising at the fastest rate since September 2008

Let us hope that the lower trajectory for some commodity prices and especially the price of crude oil continues to help in that respect.

Chocolate

The chocoholics amongst you may have noticed that the price of cocoa has fallen by about 40% over the past year. Has there been any sign of cheaper chocolate or perhaps an extra Toblerone triangle?