Mark Carney claims “this is not a debt fuelled expansion” and interest-rates will rise “sooner than markets expect” yet again!

One of the features of the credit crunch era is the way that those in authority so often get given pretty much a free pass from the media, This is illustrated starkly by the BBC’s senior economics correspondent Dharshini David.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for

Perhaps Dharshini was giddy after being given the first question at the press conference. Sadly she asked a question which might have been written by Governor Carney himself and accordingly he seemed like Roger Federer as he volleyed it nonchalantly at the net.

Missing is any questioning of the assertion such as pointing out Governor Carney told us that interest-rates would rise “sooner than markets expect” in his Mansion House speech in June 2014. When this did not happen he acquired this moniker.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden. ( BBC)

The reality was that his next move was to cut interest-rates In August 2016 followed by promises of another cut that November before yet another U-Turn. Then there was another U-Turn just over a year ago which if you recall was followed by a sharp drop in the value of the Pound £.

So you can see that it is really rather extraordinary that Dharshini either ignored or is unaware of this. I am not sure what to make of the sentence below.

But that doesn’t mean that Mark Carney or his colleagues are asleep at the wheel.

She was nearer the mark with this.

Report press conference was perhaps unprecedented number of female hacks… taken a while but face of financial journalism is changing, all the better to reflect our audiences

However there was no mention of the “woman  overboard” problem at the Bank of England which was illustrated by the 100% middle-aged male make up of its panel. The press conference highlighted this as in response to a question about diversity at the Bank of England Governor Carney responded with a barrage of “ums” and “ers”.

Still we can have a wry smile at this.

Growth actually isn’t that different to what was expected a year ago……..UK growth in the first quarter is likely to have been 0.5%, double what the Bank expected just three months ago.

Governor Carney kept pointing to the former forecast as he had a rare opportunity to bathe in a correct forecast, although he was not challenged on why they then cut the growth forecast to 0.2% so recently?

Pinocchio

In response to a rather good question about the growth of fixed-rate mortgages and its effect on the responsiveness of the economy to Bank Rate changes the Governor claimed this was nothing to do with him.  Nobody pointed out that in his first phase of Forward Guidance promising interest-rate increases there were people who were listening to him as there was a shift towards foxed-rate mortgages. Sadly, they were then shafted when Governor Carney cut interest-rates.

The point above was in a way the media catching up with one of my earliest themes from 2010 as I pointed out how market interest-rates were following official ones much less closely than before. However there was an even bigger humdinger out of Governor Carney’s mouth.

This is not a debt fuelled expansion

He has said this before and there are two main issues with this. The first is that the main policy over his tenure has been the funding for lending scheme which turned net mortgage lending positive. So more debt as shown by Wednesday’s figures.

Net lending for mortgages increased to £4.1 billion in March.

In the month before Governor Carney’s arrival the net increase was £785 million and whilst the rise has not been smooth ( early 2016 saw an incredible surge due to the buy to let changes) I think the numbers speak for themselves

Also the past three years or so has seen quite an extraordinary surge in unsecured credit something which I have been regularly documenting. It was £156.4 billion and is now around 38% higher at £216.7 billion. Can anybody think of anything else that has risen that fast as wage growth and GDP have been left far behind?

A factor in this has been something we have followed closely and was highlighted by the Office of Budget Responsibility.

 Data from the Finance & Leasing Association suggest that, between 2012 and 2016, dealership car finance contributed around three-fifths of the growth in total net consumer credit flows. Within that, around four-fifths reflected strong growth in car sales, with the remainder accounted for by a higher proportion of cars bought using dealership car finance.

So “this is not a debt fuelled recovery” means we have pumped up mortgage lending and seen quite a surge in car finance.

Inflation

Sadly for those who parroted the Bank of England line there was this. From @NicTrades

Bank of England Carney signals more than 1 hike may be needed to keep inflation in Check, while at the same time he cuts inflation forecasts.

Thus according to its inflation targeting regime an interest-rate increase is less and not more likely. Even worse the absent-minded professor Ben Broadbent gave us quite a spiel on oil markets as he tried to look on the ball, but to anyone market savvy that will have backfired too as they will have been thinking that the oil price has been falling recently. The price of a barrel of Brent Crude Oil is as I type this nearly US $5 lower since President Trump indulged in his own open mouth operation on Twitter last Friday.

Comment

The era of Forward Guidance has turned out to be anything but for the Bank of England. Governor Carney seems to have set the boy who cried wolf as his role model and the fact that he has actively misled people gets mostly overlooked. Still let us hope he is right that UK GDP grew by 0.5% in the first quarter of this year. If true that will also pose a question for the Markit series of business surveys.

At 50.9 in April, up from 50.0 in March, the seasonally
adjusted All Sector Output Index revealed a return to growth for private sector business activity.

Meanwhile our supposed football fan missed an opportunity that was taken by the ECB.

Best of luck to our local team for tonight’s semi-final!

Perhaps I am more sensitive on that front as I am a Chelsea fan, but Arsenal fans may wonder too.

 

 

India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

Is it to be higher interest-rates from Mark Carney and the Bank of England?

Yesterday saw a swathe of news from the Bank of England and in particular its Governor Mark Carney who gave evidence to the Economic Affairs Committee of the House of Lords. That is the same body I gave evidence too over the Retail Prices Index and inflation measurement more generally. In some ways he was true to form but in more recent terms opened up a new front with this.

*CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH ( @SmithEconomics )

Although @fxmacro struggled to keep the online equivalent of a straight face.

CARNEY: MARKET PATH OF BOE RATES MAY NOT BE HIGH ENOUGH algos buying on this gibberish

If we start with the algorithm buying meme that is because some automated trades operate off headlines. Things have become much more advanced than in the days of what we used to call “Metal Mickey” ( after a children’s TV programme) trading on the LIFFE floor but the essence is the same. In this instance it and other buying saw the UK Pound £ rise by around half a cent.

Actually the UK Pound £ has been rising in 2019 as the effective exchange rate index has risen from 76.25 on January 3rd to more like 80 now meaning using the old Bank of England rule of thumb that monetary conditions have tightened by a bit more than a 0.5% Bank Rate rise. So it is initially curious to say the least to be hinting at interest-rate rises especially if we see the economic news.

Markit business survey

Governor Carney was speaking not long after the Markit Purchasing Manager’s Index or PMI survey for services had been released. This completed the set which told us this.

At 51.4 in February, up from 50.3 in January, the seasonally adjusted All Sector Output Index signalled a marginal expansion of UK private sector output.

So some growth but not much as they indicated here.

“The latest PMI surveys indicate that the UK economy
remained close to stagnation in February, despite a flurry
of activity in many sectors ahead of the UK’s scheduled
departure from the EU. The data suggest the economy is on
course to grow by just 0.1% in the first quarter.”

Putting it another way.

UK PMI charted against Bank of England policy decisions. PMI still deep in dovish territory.

So if we look at the evidence such as we have it the UK economy contracted in December by 0.2% and seems to be now growing at a quarterly rate of 0.1%. Whilst I have my doubts about PMIs ( think July 2016 if nothing else) the Bank of England relies on them. So it is hinting at interest-rate rises when two main signals are much more in line with interest-rate cuts. Of course this was familiar territory in 2016 when the promise of interest-rate rises faster than markets expect ( deja vu alert ) somehow morphed into not only an interest-rate cut but promises of another smaller one ( 0.1% or 0.15%). The former happened but the latter was dropped as it turned out that the Bank of England was reading the wrong set of tea leaves.

Has something changed?

Well definitely maybe as I note this from The Times.

A disorderly no-deal Brexit would be only half as damaging as the Bank of England warned three months ago, Mark Carney has said.

So what is the detail here?

In November the Bank said that after three years the economy would be between 4.75 per cent and 7.75 per cent smaller than under the prime minister’s plan if there was a hard Brexit.

Mr Carney, the Bank’s governor, told peers yesterday that contingency plans put in place would reduce the damage by 2 percentage points in the “disruptive” model or 3.5 percentage points in the worse “disorderly” one. Both scenarios assumed that there would be significant border frictions, a market crash and a sterling collapse on March 29.

So what has changed since November?

Britain has put in place temporary simplified procedures to reduce border checks and the government has secured six EU free-trade agreements worth about 4 per cent of UK trade. “That’s something, it’s not everything,” Mr Carney said. The Bank has also struck financial services deals with the EU. Brussels, too, has taken measures to reduce friction at the borders.

This is a really awkward subject for the Bank of England which keeps finding itself having to upgrade its forecasts for the post-EU leave vote world and now for versions of the world post Brexit. In the latter example I do have some sympathy as its work was more scenario than forecast but it is also true that it could have produced examples of how things might change if deals were struck. Also the way that Governor Carney has presented things has been in line with his own opinion and has led to accusations of being one-sided.

So maybe there is an influence here on his seeming enthusiasm for interest-rate rises although we do of course have the issue that in spite of claiming large amounts of enthusiasm over the past five years or so he has in net terms delivered the grand sum of one 0.25%.

Be Prepared

Much more satisfactory and an example of the Bank of England doing the right thing came from what may seem an arcane announcement.

The transactions will be facilitated by the activation of the standing swap line between the Bank of England and the European Central Bank as part of the existing international network of standing swap lines which provide an important tool for central banks in pursuit of their financial stability objectives.

The first weekly operation will be on 13 March and operations will run until further notice.

Actually the ECB makes it clearer as to what might happen.

Bank of England to obtain euro from the ECB in exchange for pound sterling.

Also as some may miss this then this is also true.

As part of the same agreement, the Eurosystem would stand ready to lend pound sterling to euro area banks, if the need arises.

So these arrangements provide a backstop for “the precious” otherwise known as the banking system. In terms of use it has mostly been European banks activating such lines usually to get US Dollars but there was a phase of requiring Swiss Francs. Also Japanese banks have needed US Dollars from time to time. There is an irony if we look at the present role of Ireland that the particular swap lines we are looking at today were brought in to help the Central Bank of Ireland if it needed UK Pounds.

Putting the wolf in charge of the chicken house

As the Bank of England is potentially the body that is most keen on eliminating cash so it can more easily introduce negative interest-rates today’s news which the media has latched onto is an example of gallows humour.

Sarah John, Chief Cashier, said: “We are committed to cash. Although its use is declining, many people, including vulnerable groups, still prefer to use cash. It is important that everybody has a choice about how they make payments.  The action we are announcing today will help to support cash as a viable means of payment for those who want to use it.”

The Bank is today announcing that it will convene relevant stakeholders to develop a new system for wholesale cash distribution that will support the UK in an environment of declining cash volumes.

Comment

There is a fair bit of uncertainty to say the least about what will happen in the UK as we move into April. Will we Brexit or not and if so in what form? The problem with the forecasts produced by the Bank of England are that many of the variables were unknown and some still are. We are left with the view that under Governor Carney it has been more than happy to push the establishment line which would chop another leg off the independence chair if you can find one. It is simply not its place to be cheered by one side of the debate and attacked by the other.

Moving to more technical issues I welcome the way that the FX swap lines are being made ready. Some of that is just for show as they could have been used anyway but it does no harm to show that you are prepared. As ever it is about the banks but for once the rest of us benefit too.

Lastly let me move onto a subject I spend much time on so will be brief. From the Financial Times.

UK must tackle RPI inflation reform, Mark Carney says

So he has been cracking on with it since 2013 then? Er no. I have been as regular readers will be aware but both the Financial Times and the Bank of England have stood in the way. Added to this is his suggestion that we only need one measure of consumer inflation when the ones for macroeconomics and the cost of living are really rather different due to the way the housing sector can disappear in the former like they are a Klingon battle cruiser in Star Trek.

The Bank of England is not “paralysed” on interest-rates

From time to time we have the opportunity to observe the spinning efforts of the house journal of the Bank of England. So without further ado let me hand you over to the Financial Times.

Bank of England ‘paralysed’ on rates by Brexit uncertainty.

The first thought is which way?But then we get filled in.

Turmoil of EU departure constrains policymakers despite tight labour market.

So up it is then, but of course that brings us to territory which is rather well trodden. You see the Bank of England has raised Bank Rate a mere two times in the last eleven years! Thus the concept of it being paralysed by Brexit prospects is a little hard to take. Whereas on the other side of the coin it was able to cut interest-rates from the 5.75% of the summer of 2007 to the emergency rate of 0.5% very quickly including a reduction of 1.5%. That reduction was twice the current Bank Rate and six times the size of the 0.5% rises. Also we note that the panic rate cut of August 2016 not only happened quickly but means that the net interest-rate increase since the comment below has been a mere 0.25%.

This has implications for the timing, pace and degree of Bank Rate increases.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

That was Governor Mark Carney at Mansion House in June 2014 and we now know that “sooner than markets expect” turned out to be more than four years before Bank Rate rose above the 0.5% it was then. But I do not recall the FT telling us about paralysis then about our “rock star” central banker.

The case for an interest-rate rise

There is one relief as we do not get a mention of the woefully wrong output gap concept. But we do get this.

Unless the UK’s sub-par productivity improves, the BoE has argued, unemployment cannot remain at current lows without wage growth feeding consumer prices. The latest data showed the labour market tightening again with employment at a record high and wage growth back to pre-crisis levels. “If they further home in on labour market trends, it will be a clear steer that they have a bias to tighten,” said David Owen, chief European economist at Jefferies, who thinks market pricing currently underestimates the likelihood of UK interest rates rising.

There are two main issues with the argument presented. The first is the productivity assumption where the Bank of England now assumes it has a cap based on a “speed limit” for the economy of an annual rate of growth of 1.5%. It’s assumptions are more likely to be wrong that right. Next is that wage growth is back to pre-crisis levels which is simply wrong. It is around 1% per annum short in nominal terms and simply nowhere near in real terms.

According to Kallum Pickering at Berenberg the Bank of England has really,really,really,really,really,really ( Carly Rae Jepsen)  wanted to raise interest-rates.

“The BoE would be close to the Fed on rate profile if it weren’t for Brexit . . . The Fed wants to pause, but the BoE has gone slower than otherwise,” he said, adding that barring a hard Brexit, the MPC would need to increase rates for a couple of years to catch up.

Sooner of later someone will turn up with the silliest example of all.

Although the BoE maintains it has plenty of firepower to fight any downturn, some outsiders believe one motive to raise interest rates is to gain space to inject stimulus if needed.

A type of Grand Old Duke of York strategy where you march interest-rates to the top of a hill just so that you can march them down again.

Some Reality

The water gets rather choppy as we find a mention of the inflation target.

Similarly, the BoE is likely to cut its near-term forecast for inflation — already close to target, at 2.1 per cent in December, and set to fall further after a drop in energy prices.

If you were serious about raising interest-rates then the period since February 2017 when inflation went over target would be an opportunity to do so except we only got a reversal of the August 2016 mistake and one other. If you go at that pace when inflation is above target it would be really rather odd to do much more when it is trending lower.

The next issue is the economic outlook where we have been recording economic slow downs in both China and Europe. Some of this is related to the automotive sector which has always affected the UK via Jaguar Land Rover and more recently Nissan. On its own that would make this an odd time to raise interest-rates. If we move to the UK outlook then this mornings Markit Purchasing Manager’s Index or PMI tells us this.

January data indicated a renewed loss of momentum for
the UK service sector, with a decline in incoming new work
reported for the first time since July 2016. Subdued demand
conditions meant that business activity was broadly flat
at the start of 2019, while concerns about the economic
outlook weighed more heavily on staff recruitment. Latest
data pointed to an overall reduction in payroll numbers for
the first time in just over six years.

Some care is needed here as the Markit PMI misfired in July 2016 but we need to recall that the Bank of England relied on it. We know this because that October Deputy Governor Broadbent went out of his way to deny it.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately
after the referendum and, although we aimed off those significantly, somewhat more strongly than our near term forecasts as well.

So in spite of it being an unreliable indicator at times of uncertainty like now I expect the Bank of England to be watching it like a hawk. If so they will be looking at this bit.

Adjusted for seasonal influences, the All Sector Output Index posted 50.3 in January, down from 51.5 in December. The index has posted above the crucial 50.0 no-change mark in each month since August 2016, but the latest reading signalled the slowest pace of expansion over this period and the second-lowest since December 2012.

If accurate that is in Bank Rate cut territory rather than a raise.

Comment

There is a fair bit to consider here so let us start with the “paralysis” point and let me use the words of the absent-minded professor Ben Broadbent from October 2016.

Before August, the UK’s official interest rate had been held at ½% for over seven years, the longest period of
unchanged rates since 1950. No-one on the current MPC was on the Committee when rates were previously
changed, in early 2009; indeed there are children now at primary school who weren’t even alive at the time.

Oh well as Fleetwood Mac would put it. Next comes the issue of why the Bank of England is encouraging what is effectively false propaganda about raising interest-rates? Personally I believe it is a type of expectations management as they increasingly fear that they will have to cut them again. So we are being guided towards the view that events are out of their control. This is awkward as we note the scale of their interventions ( for example some £435 billion of QE) and the way that positive news is always presented as being the result of their actions. Yet they also claim when convenient that lower interest-rates are nothing to do with them at all.

As to my view I am still of the view that we need higher interest-rates but that now is not the time. The boat sailed in the period 2014-16 when the rhetoric of Forward Guidance was not matched by any action. It is hard not to have a wry smile at us being guided towards a 7% unemployment rate then 6.5% and so on to the current 4%.

Hard Times at the Bank of England on both Forward Guidance and inflation expertise

It is time for us to dip back into the data in the UK economy as we look at retail sales, But before we get there we have seen another development and it has come from UK Gilt yields which are the cost of borrowing for the UK government. I have been writing for some time that they have been very low due to the fear for some or expectation for others that the Bank of England will start a new phase of QE ( Quantitative Easing) bond purchases. At the nadir the UK ten-year yield dipped below 1.2% which still left plenty of margin as the Sledgehammer QE drove it down to 0.5%. I still consider that to be madness but it is something the media and other economists do not understand so any debate stalls. But the Gilt yield issue is that it has risen to 1.37% which if it goes a little further will have economic effects via fixed-rate mortgages and business borrowing.

In terms of context other bond yields have also risen but the UK has seen its rise faster. Even I cannot entirely avoid politics so let me add that there were roads this week when Brexit developments ,might have led to UK Gilt yields falling due to expectations of more Bank of England QE in spite of the international trend. Should fixed-rate mortgages rise in price then we can perhaps expect a little more of this.

The UK housing market ended 2018 on a weak note with uncertainty still biting, alongside continuing lack of stock and affordability issues, according to the December 2018 UK Residential Market Survey. ( Royal Institute of Chartered Surveyors or RICS)

Also they expect things to get worse.

Moving forward, however, over the next three months sales expectations are now either flat or negative across the UK. The headline net balance of -28% represents the poorest reading since the series was formed in 1999. The twelve-month outlook is a little more upbeat, suggesting that some of the near-term pessimism is linked to the lack of clarity around what form of departure the UK might make from the EU in March.

Worse for them I mean as lower house prices would benefit first time buyers who have seen house prices accelerate away from them in nominal and real terms in the credit crunch era.

Also they seem to have their doubts about the promised future supply.

Meanwhile it is hard to see developers stepping up the supply pipeline in this environment. Getting to the government’s 300,000 building target was never going to be easy but pushing up to anywhere near this figure will require significantly greater input from other delivery channels including local authorities taking advantage of their new-found freedom.

That of course would be a case of history on repeat or as the Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

Ben Broadbent

The issues above will not make the Bank of England very happy and this will add to the dark cloud around Deputy Governor Broadbent otherwise known as the absent-minded professor. Here is an excerpt from something I posted on the Royal Statistics Society website in October.

” there are fewer than 10 million owner occupier mortgages. Is the cost of a house to someone who happens
already to have paid off his or her mortgage really zero?”

So we see that we cannot use something which is used around 10 million times but we can use the Imputed Rents which are used precisely zero times! I do not recall anyone arguing for mortgage costs to be used for those who do not have one, in the way he is calling for rents to be used for those who do not pay them. For example the RPI has mortgage costs, but also as a considerably larger component house prices  via  the use of depreciation.

The absent-minded professor spoke up strongly for the Rental Equivalence model which the House of Lords rejected this week. Also they were disappointed with other aspects of his performance.

Let me end by congratulating the Lords and Baroness Bowles on pressing the Deputy Governor responsible for the RPI on the issue of what Yes Prime Minster satirised as “Masterly Inaction”. As they point out there are changes which could have been made as opposed to the state of play during his tenure.

“That process seems to have stalled.”

Retail Sales

These were something of a journey and had a kicker that seems to have been missed in the melee so let me explain.

When compared with the previous month, the quantity bought in December 2018 decreased by 0.9%, as all sectors except food stores and fuel stores declined on the month.

So down except we know the numbers are regularly erratic and are likely to be even more so with the advent of Black Friday in November. Let us therefore look for more perspective.

In the three months to December 2018, estimates in the quantity bought decreased by 0.2% with declines across all main sectors except fuel.

As to the wider impact Rupert Seggins has crunched some numbers.

UK retail sales fell -0.2%q/q in the final quarter of 2018, indicating that the retail sector took -0.01% off GDP growth in Q4.

If we move to the annual comparison though we get some relief as the volume figures were 3% higher if we return to the December numbers with fuel sales and 2.6% without or a 0.17% addition to GDP using Rupert’s calculator. But there has been a slowing even with such numbers.

Looking at annual growth rates, the whole of 2018 increased by 2.7% in the quantity bought; an annual slowdown in comparison with the peak of 4.7% experienced in 2016.

One of the things which bemuses me from time to time is that it is often those who support issues such as climate change who seem most unhappy about a decline in retail sales growth missing the logical link. But my main point here is that if we compare the volume and sales figures retail inflation is a mere 0.7% on an annual basis.

Comment

It was only last week that I suggested that the Bank of England was giving the wrong Forward Guidance about interest-rates as the economic outlook darkens. If the rough and ready calculator for retail inflation is in any way accurate then that is reinforced by today;s number and that adds to the lower consumer inflation numbers we saw earlier this week. Added to that the Bank of England has publicly backed the wrong horse in the inflation measurement stakes.

Even worse it has backed the establishment line driven by Her Majesty’s Treasury which is precisely the body it is supposed to be independent from. Perhaps that is something to do with the fact that the Deputy-Governors are HM Treasury alumni in a case of what in another form we call “regulatory capture”.

Podcast

 

 

What can we expect next from UK house prices?

A feature of the credit crunch era has been the way that central banks have concentrated so much firepower on the housing market so that they can get house prices rising again. Of course they mostly hide under the euphemism of asset prices on this particular road. For them it is a win-win as it provides wealth effects and supports the banking sector via raising the value of its mortgage book. The increasingly poor first time buyer finds him or herself facing inflation via higher prices rather than wealth effects as we note the consumer inflation indices are constructed to avoid the whole issue.

This moves onto the issue of Forward Guidance which exists mostly in a fantasy world too. Let me give you an example from the Bank (of England) Underground Blog.

 It is reasonable to suppose that the more someone knows about a central bank and how it conducts policy, the more confidence they will have that the central bank will act to bring inflation back to target.

Really? To do so you have to ignore the two main periods in the credit crunch era when the Bank of England “looked through” inflation above target as real wages were hit hard. Yet they continue to churn out this sort of thing.

 And Haldane and McMahon, using the institutional knowledge score discussed above, show that for the UK, higher knowledge corresponds to greater satisfaction with the Bank, and inflation expectations closer to 2% at all horizons.

So according to the Bank of England you are none to bright if you disagree with them! I think it would have been better if Andy Haldane stuck to being a nosy parker about others Spotify play lists.

The area where the general public has I think grasped the nettle as regards central banking forward guidance is in the area of house prices. The Bank of England loudspeakers have been blaring out Yazz’s one hit.

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

Indeed even if things go wrong then we can apparently party on.

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

Where are we now?

If we switch to the current state of play we are in a situation where the new supply of moves to boost house prices have dried up. For example the Term Funding Scheme ended in February and after over four years of dithering the Bank of England raised Bank Rate to 0.75% in August. Combining this with the fall in real wages after the EU leave vote led to me expecting house prices to begin to fall but so far only in London has this happened. One factor in this has led to a blog from the National Institute of Economic and Social Research or NIESR last week.

The key point is that although the political turmoil was of great concern, the impact on bond prices followed a pattern we have seen before in which risk rises but expectations of a policy response militate against the risk.

The politics may be of great concern to the NIESR but the UK Gilt market has been driven by the intervention of the Bank of England. Not only has it already bought some £435 billion of it but its behaviour with the Sledgehammer QE of August 2016 has led to expectations of more of it in any setback. The irony is that good news may make the Gilt market fall because it makes extra QE less likely. The impact of this has been heightened by the way the Bank of England was apparently willing to pay pretty much any price for Gilts in the late summer of 2016. For the first time ever one section of the market saw negative yields as the market picked off the Bank of England’s buyers.

Mortgage Rates

This is where the Gilt yield meets an economic impact. If we think about mortgage rates then they are most driven by the five-year yield. On the day of the August Bank Rate it was 1.1% and of course according to the Bank of England the intelligent observer would be expecting further “limited and gradual rises” along the lines of its forward guidance. Yet it is 0.96% as I type this and the latest mortgage news seems to be following this. From Mortgage Strategy.

TSB has reduced interest rates by up to 0.35 per cent on mortgages for residential, home purchase and remortgage borrowers.

Changes applied include reductions of up to 0.35 per cent on five-year fixed deals up to 95 per cent LTV in its house purchase range; reductions of up to 0.25 per cent on two-year fixes up to 90 per cent LTV; and up to 0.30 per cent on five-year fixes up to 90 per cent LTV for remortgage borrowers.

That was from Friday and this was from Thursday.

Investec Private Bank has announced cuts to a series of its fixed and tracker mortgages.

Reductions total up to 0.50 per cent, and all within the 80 per cent – 85 per cent owner-occupier category.

Specifically, the variable rate mortgage has been cut by 0.50 per cent, the three-year fixed rate product by 0.10 per cent, the four-year by 0.15 per cent, and the five-year fixed rate by 0.20 per cent.

So the mortgage rates which had overall risen are in some cases on the way back down again. We will have to see how this plays out as Moneyfacts are still recording higher 2 year mortgage rates ( 2.51% now versus the low of 2.33% in January). I am placing an emphasis on fixed-rate mortgages because of the recent state of play.

The vast majority of new mortgage loans – 96% – are on fixed interest rates, typically for two or five years.

Currently half of all outstanding loans are on fixed rates, equating to about 4.7 million households.  ( BBC in August).

Lending

According to UK Finance which was the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield this is the state of play.

Gross mortgage lending across the residential market in October was £25.5bn, some 5.6 per cent higher than last October. The number of mortgages approved by the main high street banks in October was 4.1 per cent lower than last October; although approvals for house purchase were 3.6 per cent higher, remortgage approvals were 13.5 per cent lower and approvals for other secured borrowing were 1.3 per cent lower.

If they are right this seems to be a case of steady as she goes.

Comment

The situation so far is one of partial success for my view if the monthly update from Acadata is any guide.

House prices rebounded in October, up 0.4% – the first increase since February. The annual rate of price increases
continued to slow, however, dropping to just 1.0%.
Despite this, most regions continue to show growth, the exceptions being both the South East and North East, which show modest falls on an annual basis. The average price of a home in England and Wales is now £304,433, up from £301,367 last October.

So no national fall as hoped ( lower house prices would help first time buyers) but at east a slowing of the rise to below the rate of growth of both inflation and wages. There is also plenty of noise around as one official measure is still showing over 3% growth whilst the Rightmove asking prices survey shows falls. As ever the numbers are not easy to wade through as for example I have my doubts about this.

In London annual price growth has slowed substantially in the last month, falling to just 1.8%, yet there has still been an increase of £10,889 in the last twelve months with the average price in London now standing at £620,571.

The noose around house prices is complex as for example we have seen today in the trajectory of mortgage rates and reporting requires number-crunching as this from Politics Live in the Guardian shows.

GDP per head would fall by 3% a year, amounting to an average cost per person a year of £1,090 at today’s prices.

I would like to see an explanation of why it would fall 3% a year wouldn’t you? Much more likely the NIESR suggests a 3% fall in total and just for clarity it is against a rising trend. Of course if we saw falls as reported in the Guardian we would see the 18% drop in house prices suggested by some before the EU referendum whereas so far we have seen a slowing of the rises. But the outlook still looks cloudy for house prices and I still hope that first time buyers get some hope in terms of lower prices rather than help to borrow more.

Podcast

The Mark Carney Show has misfired again

Yesterday was something of an epoch-making day for the UK but it also turned into a rather odd one. Also this morning has produced another piece of evidence for my argument that we finally got a rise in official interest-rates above the emergency 0.5% level because the Bank of England finally thought the banks have recovered enough to take it. From the Financial Times.

Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a major milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4 per cent stake. The bank will pay an interim dividend of 2p per share after it confirms a final agreement on a recent fine with the US Department of Justice.

So even RBS has made some progress although it remains attracted to disasters like iron filings to a magnet as this seems a clear hint that it managed to be long Italian bonds into the heavy falls.

 RBS blamed “turbulence in European bond markets” for a 20 per cent drop in income at Natwest Markets.

As an aside the Italian bond market is being hit again today with the ten-year yield pushing over 3%.

Returning to the UK we also saw a 9-0 vote for a Bank Rate rise as I predicted in my podcast. This was based on my long-running theme that they are a bunch of “Carney’s Cronies” as five others suddenly changed their mind at the same moment as him, making the most popular phrase “I agree with Mark”. As some are on larger salaries added to by generous pension schemes we could make savings here.

A Space Oddity

This was provided by the currency markets which initially saw the UK Pound £ rally but then it fell back and at the time of writing it has dipped just below US$1.30. The US Dollar has been strong but at 1.122 we have not gained any ground against the Euro either at 145 we lost ground against the Japanese Yen.Why?

At first Governor Carney backed up his interest-rate rise with talk of more as in the press conference he suggested that 3 rises over the next 3 years was his central aim. Of course his aim has hardly been true but this disappeared in something of a puff of smoke when he later pointed out that he could keep interest-rates the same or even cut them. This rather brain-dead moment was reinforced by pointing out that he had cut interest-rates after the EU leave vote. This left listeners and viewers thinking will he cut next March?

Then he told Sky News this.

Mark Carney tells me is prepared to cut interest rates back again depending on how Brexit negotiations go. ( Ed Conway)

This morning he has managed to end up discussing interest-rate cuts with Francine Lacqua of Bloomberg after a brief mention of further rises. Then he added to it with this.

Mark Carney threw himself back into the thick of the Brexit debate on Friday, saying the chance of the U.K. dropping out of the European Union without a deal is “uncomfortably high.”

He also spoke to the Today programme on Radio Four which of course has its own audience troubles and here is the take away of Tom Newton Dunn of The Sun,

Blimey. Carney reveals the BoE recently ran a Brexit no deal exercise that saw property prices plummet by a third, interest rates go up to 4%, unemployment up to 9%, and a full-blown recession.

You can see from that why rather than a rally the UK Pound £ has struggled rather than rallied.  Due to his strong personal views Governor Carney keeps finding himself enmeshed in the Brexit debate which given his views on the subject will always head towards talk of interest-rate cuts. He is of course entitled to his personal views but in his professional life he keeps tripping over his own feet as just after you have raised interest-rates this is not the time for it. He could simply have said that like everyone else he is waiting for developments and will respond if necessary when events change.

Oh and we have heard this sort of thing from Governor Carney before. How did it work out last time?

interest rates go up to 4%

 

Today’s News

This has added to the theme I posited yesterday about the interest-rate increase which can be put most simply as why now?

The latest survey marked two years of sustained
new business growth across the service sector
economy. However, the rate of expansion eased
since June and was softer than seen on average
over this period. ( Markit PMI )

This followed a solid manufacturing report and a strong construction one but of course the services sector is by far the largest. This added to the report from the Euro area.

If the headline index continues to track at its current
level, quarterly GDP growth over the third quarter as
a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official
Eurostat data for quarter two.

Whilst these surveys are by no mean perfect guides there does seem to be something going on here and as I pointed out yesterday it is consistent with the weaker trajectory for money supply growth.

The UK Pound £

This did get a mention in the Minutes.

The sterling effective exchange rate had depreciated slightly since the Committee’s previous meeting and was down 2.5% relative to the 15-day average incorporated in the May Report.

This is awkward on two fronts. Firstly the fall was at least partly caused by the way Governor Carney and his colleagues clearly hinted at an interest-rate rise back then but then got cold feet in the manner of an unreliable boyfriend. Next comes the realisation that all the furore over a 0.25% interest-rate rise mostly ignores the fact that monetary conditions have eased as the currency fall is equivalent to a ~0.6% cut.

R-Star

This appeared having been newly minted in the Bank of England Ivory Tower. Or at least newly minted in £ terms as the San Francisco Fed put it like this last year.

The “natural” rate of interest, or r-star (r*), is the inflation-adjusted, short-term interest rate that is consistent
with full use of economic resources and steady inflation near the Fed’s target level.

If anyone has a perfect definition of “full use of economic resources” then please send it to every Ivory Tower you can find as they need one. Actually the Bank of England has by its actions suggested it is near to here which is rather awkward when they want to claim it is somewhere above 2%. Actually I see no reason why there is only one and in fact it seems likely to be very unstable but in many ways David Goodman of Bloomberg has nailed it.

They don’t know their r* from their elbow

Comment

This is all something of a dog’s dinner and I mean that in the poetic sense because in reality dog’s in my family  always seem to be fed pretty well. We have monetary policy being delivered by someone who looks as though he does not really believe in it. Even the traditional support from ex Bank of England staff seems to be half-hearted this time around and remember that group usually behave as if The Stepford Wives is not only their favourite film but a role-model.

If this is the best that Mark Carney can do then the extension of his term of tenure by Chancellor Hammond can be summed up by Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake