The Bank of England may consider yet more easing going forwards

Today the Bank of England announces its policy decision although care is needed because it actually voted yesterday. This was one of the “improvements” announced a while ago by Governor Mark Carney and it is something I have criticised. My views have only been strengthened by this development. From the Financial Times today.

Andrew Tyrie wrote to the Financial Conduct Authority on Wednesday to ask the regulator to scrutinise unusual patterns of trading behaviour ahead of market-moving data releases. “It would be appalling, were people found to be exploiting privileged pre-release access to ONS data for financial benefit,” said Andrew Tyrie, the chairman of the select committee, referring to the Office for National Statistics. “The FCA is responsible for market integrity. So I have written to them today to ask them to get to the bottom of this.”

Whilst this is not directly related to the Bank of England the UK ship of state looks increasingly to be a leaky vessel. As ever Yes Prime Minister was on the case 30 years ago.

James Hacker: I occasionally have confidential press briefings, but I have never leaked.
Bernard Woolley: Oh, that’s another of those irregular verbs, isn’t it? I give confidential press briefings; you leak; he’s been charged under Section 2a of the Official Secrets Act.

These are important matters where things should be above reproach. Speaking of that it is another clear error of judgement by Governor Carney to allow Charlotte Hogg to vote on UK monetary policy this week. The official releases about her resignation have skirted over the fact that she demonstrated a disturbing lack of knowledge about monetary policy when quizzed by the Treasury Select Committee leading to the thought that her actual qualification was to say ” I agree with Mark”.

Other central banks

The Swiss National Bank has joined the groupthink parade ( if you recall something Charlotte Hogg denied existed) this morning. Whilst busy threatening even more foreign exchange intervention and keeping its main interest-rate at 0.75% it confessed to this.

economic growth in the UK was once again surprisingly strong.

US Federal Reserve and GDP

There was something to shake the Ivory Towers to their foundations in the comments of US Federal Reserve Chair Janet Yellen yesterday evening. From the Wall Street Journal.

The Atlanta Fed’s GDPNow model today lowered its forecast for first-quarter GDP growth to a 0.9% pace. But Ms. Yellen shrugged off signs of weakness in the gauge of overall U.S. economic activity.


“GDP is a pretty noisy indicator,” she said, and officials haven’t changed their view of the outlook. The Fed expects continued improvement in the labor market and broader economy, though she also cautioned that policy isn’t set in stone.

Central banks have adjusted policy time and time again in response to GDP data and for quite some time Bank of England moves looked like they were predicated on it. Now it is apparently “noisy” which provides quite a critique of past policy. Also what must she think of durable goods and retail sales numbers?! Also this is like putting the one ring in the fires of Mordor to the Ivory Towers who support nominal GDP targeting. Oh and as we have observed more than a few times in the past the first quarter number for US GDP has been consistently weak for a while now leading to the issue of “seasonal adjustment squared”.

Things to make Mark Carney smile

Central bankers love high asset prices so let us take a look. From the BBC.

The UK’s FTSE 100 share index has broken through 7,400 points to hit a record intra-day high. The blue chip index is currently trading at 7,421 points.

The official data on house prices is a little behind but will raise a particular smile as of course it helps the mortgage books of the banks.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Maybe even a buyer or two in central London.

Just faced a sealed bid stuation for a client buying a house in Knightsbridge. Life in the London property market is back. ( @joeccles )

Also with the ten-year Gilt yield at 1.22% then UK bonds are at an extremely high level in price terms albeit not as high as when Mark surged into the market last summer.

Maybe even the Bank of England’s investments in the corporate bonds of the Danish shipping company Maersk can be claimed to be having a beneficial effect.

Maersk Oil has managed to cut operating expenditure by about 40% in the last two years, and analysts at Wood Mackenzie predict the company will be the third biggest investor in the UK continental shelf (UKCS) by 2020. (h/t @chigrl )

Although Maersk put it down to a change in taxation policy and there is little benefit now for the UK from this bit.

He was speaking to Energy Voice at the yard in Singapore where the floating storage and offloading (FSO) unit for the £3.3billion North Sea Culzean project is being built.

In terms of good economic news there was this announcement today. From the BBC.

Toyota is to invest £240m in upgrading its UK factory that makes the Auris and Avensis models.

The Japanese carmaker’s investment in the Burnaston plant near Derby will allow production of vehicles using its new global manufacturing system.

Things to make the Bank of England frown

Ordinarily one might expect to be discussing the way that UK inflation will go above target this year and maybe even next week. But we know that the majority of the Monetary Policy Committee plan to “look through” this and thus will only pay lip service to it. However yesterday’s news will give them pause.

If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

They will now be worried about wages growth and should this continue much of the MPC will concentrate on this.


Today seems to be set to be an “I agree with Mark” fest unless Kristin Forbes feels like a bit of rebellion before she departs the Bank of England in the summer. However should there be any other signs of weakness in the UK economy then we will see some of the MPC shift towards more easing I think in spite of the inflation trajectory. That means that it will be out of sync with the US Federal Reserve and the People’s Bank of China ( which raised some interest-rates by either 0.1% or 0.2% this morning).

It may cheer this as an example of strength for the UK property market and indeed banks. From the Financial Times.

BNP Paribas is in talks to acquire Strutt & Parker, the UK estate agents, in what would be a Brexit-defying vote of confidence in the British property market by France’s biggest bank.

Can anybody recall what happened last time banks piled into UK estate-agents?


On Monday I suggested that we would see more Operation Twist style QE from the Bank of England today. Apologies but I misread the list and that will not be so. Off to the opticians for me.


How will the current financial market turmoil affect the UK economy?

At the moment all eyes are on China as it faces yet more stock market turmoil. My subject of Friday looked into the chaos theory view of the impact of a butterfly fluttering its wings and this morning they have certainly fluttered with the Shanghai Composite falling some 8.7% to 3211. Markets across the Pacific too fell and the Abenomics policy of Japan will not be pleased to see the Nikkei 225 equity index falling 895 points to 18540 as part of it is based on the wealth effects of higher equity prices. Also of course the Bank of Japan has been buying Japanese shares via ETFs (Exchange Traded Funds). My theme of today is to look at the impact on the UK and to have as a sub-plot the impact of falling equity markets on economies and in this case sharply falling ones. This is of course the reverse of modern central banking theory as it is an antithesis of QE (Quantitative Easing) policies being deployed by many central banks around the world which are relying on higher asset prices.

Up Up and Away

Whilst it is in some ways reassuring to be reminded that in Star Wars terms there is indeed a place which is “far,far,away” maybe the UK CBI (Confederation of British Industry) shouldn’t be living there!

The UK’s leading business group is forecasting 2.6% GDP growth for 2015, up from 2.4% in June, and 2.8% in 2016, up from 2.5%.

An interesting time to release that you might reasonably think and also there is the issue of them feeling they can forecast the UK GDP to an accuracy of 0.1%. If only! But let us examine what underlies their positive view of the UK economy.

The upgrade is due to a combination of factors, including signs of recovering productivity in the first half of this year feeding through to stronger wage growth. Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending.

Okay so far so reasonable what else?

Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.

At this point Goldilocks porridge is looking “just right” as consumption and investment expand together although to be perfect we would hope for more exports.

net trade looks set to drag on GDP growth in both 2015 and 2016.

The underlying message here should be played with the Outhere Brothers on the CBI tannoy.

I say, boom boom boom now let me hear you say wayoh

Or to be more specific.

As a result, we expect decent quarterly GDP growth ahead: we anticipate growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in Q2 2015.

So we move on from a universe where all is happy and bright and rather than continually promising to raise interest-rates the Bank of England has already done so!

UK Retail Sales

Last week’s data reminded us of this.

Year-on-year estimates of the quantity bought in the retail industry grew for the 28th consecutive month in July 2015, increasing by 4.2% compared with July 2014.

And also the reason why it has happened.

Average store prices (including petrol stations) fell by 3.0% in July 2015 compared with July 2014; the 13th consecutive month of year-on-year price falls. All store types except textile, clothing and footwear stores reported decreases.

So the growth is being driven by lower prices and backs up the CBI argument above. Indeed with the price of a barrel of Brent Crude Oil falling towards US $44 this morning we can expect more of it should it remain at such levels. Regular readers will be aware that I was making this point when the headlines were screaming “deflation” as a bad thing. From January 29th.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

UK House Prices

If we think of one UK asset price falling then minds naturally turn to wonder what UK house prices will do next. A troubling view which brings many themes of this blog together has been suggested by the Financial Times today.

Companies that bought properties after the credit crunch that ended in 2009 have cashed in £3.4bn of London property — pocketing £870m in profits — in the past two years, according to analysis by property advisers Cushman & Wakefield.

Also the numbers show an extraordinary volume level.

Total investment volumes in the central London market hit a record £24.6bn last year, Cushman & Wakefield’s figures show — topping previous record deal volumes in 2013.

So we are left wondering if the smart money has now been and gone to some extent and also if the newer investors or ones with short time spans meaning that the situation just got more precarious. That is an issue in itself but is also one which may topple over into a least part of the residential housing market.

Nine Elms, is seeing a wave of “flat-flipping” as investors try to sell unbuilt properties amid fears the capital faces a glut of expensive homes.

Oh dear so much for the property boom just up the road from me! I do hope we still get the Tube link it has been promised for the 20 years I have lived there. I also note a comment which provides some perspective from an FT article from 6 months ago.

“About 54,000 homes are either planned or already under construction in the priciest areas of the capital…”

“Most of these homes will be priced at close to or above £1m. However, just 3,900 homes worth more than £1m were sold in these areas in 2014…”

So if the current turmoil continues it will not be only equity prices which are falling in London. Can a bubble burst safely?

Currency Wars

Much is happening here as we see some currencies devalue and depreciate as others rise. I note that Canadian investors have been buying London commercial property and for them the rise of the UK Pound £ versus the Loonie will be welcome and last week there was the devaluation from Kazakhstan added to today by the UK Pound now buying 109 Roubles.

However on the other side of the coin the Euro has strengthened again in a move one might not have expected in the midst of the ECB’s continuing QE program. At nearly 1.15 versus the US Dollar it has pushed us below 1.37.


Back in July 2012 the Bank of England told us this.

In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

Which in its view contributed to this.

it is important to remember that without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. More companies would have gone out of business.

They estimated that the wealth gain could have been £600 billion or £10,000 each if distributed evenly. Of course the distribution is far from even as the concept of the 0.1% demonstrates. The Bank of England then somewhat contradicted its hype by started the Funding for Lending Scheme to subsidise banks via pumping up house prices as a result of lower mortgage rates.

So we see that the Bank of England was not as convinced of the beneficial wealth effects from a rising equity market as it claimed as otherwise it would not have started FLS. With the FTSE 100 at 6050 some of the beneficial effects have gone and that is before we consider what may have happened to margin traders on the drop. Also there is the fact that falls like this have a different impact to a sustained rise as China is about to find out.

However the real driver for the UK economy in an asset price sense is the housing market and house prices. If we move from what the Bank of England says to what it did (FLS) we know that it agrees. So if the UK economy is to be affected we need not only to look at other economies such as China but also keep a close eye on the property market.