This morning has brought news that is like a ray of sunshine to Bank of England Governor Mark Carney. Indeed I am told he keeps checking if the sun has gone over the yardarm. From Reuters.
British house prices jumped in February, rising by 5.9 percent from January, mortgage lender Nationwide said on Thursday.
In annual terms, prices were up by 2.8 percent in the three months to February, the lender said.
A Reuters poll of economists had pointed to a 0.1 percent increase on the month and a 1.0 percent annual rise in prices.
Halifax’s index has tended to be more volatile than other measures of house prices of late.
Actually if you crunch the numbers UK house prices were 5.3% higher in February than in February 2018. So any junior at the Bank of England spotting this and telling the Governor will go straight on the fact-track promotion scheme. In case you are wondering why there is a difference between that and the number reported it is because the Halifax uses quarterly and not monthly numbers for annual growth.
In the latest quarter (December – February) house prices were 1.8% higher than in the preceding three months (September – November).
As we break the numbers down we see that there is a clear issue with monthly volatility with the last four months showing growth of -1.2%,2.5%,-3% and now 5.9%.So the series has increasingly placed itself in question.
Maybe they have been looking at Fulham which for some reason has seen quite a pick up in activity recently although care is needed as it saw drops this time last year.I also note that some of you have been pointing out a bit of a boom in the Midlands. Perhaps the Halifax only went to these two areas in February but however you try to spin it this months number reduces the credibility of the series.
Actually it also has rather caught out Silvana Tenreyro of the Bank of England who has not been keeping up with current events.
And official UK house price growth has also fallen, from an annual rate of 8% in mid-2016 to below
3% in the latest data. The growth rate of the Nationwide house price index, a timelier indicator, has fallen
She sort of backs the Bank of England party line as she says “I agree with Mark” with little apparent enthusiasm.
So while I still envisage that in the event of a smooth Brexit we will need a small amount of tightening over
the next three years, before voting for any rate rises I would want to be confident that demand was growing
faster than supply.
She also repeats the Bank of England standard that whilst they are giving us Forward Guidance of higher interest-rates in fact interest-rates may go up or down.
As the MPC has long emphasised, the monetary policy response to such a scenario will depend on the
balance of these effects on supply, demand and the exchange rate. In my judgement, a situation where the
negative demand effects outweigh those other effects is more likely, which would necessitate a loosening in
policy. But it is easy to envisage other plausible scenarios requiring the opposite response.
Although as no doubt many of you have already spotted she seems to have “a loosening in policy” in mind. Also she does seem rather obsessed with one subject.
And however Brexit affects the economy, my monetary
policy decisions will continue to be framed by the MPC’s remit.
As to the more technical details after more than a few assumptions she thinks she has detected a rise in productivity growth.
More sophisticated statistical filtering
methods tell a similar story to these simple averages, with the trend of four-quarter productivity growth
picking up gradually from 0.1% in 2012 to 0.7% in 2018 when using the backcast data.
I would just warn that the accuracy of the numbers here may not be enough to support such filtering. Also her view that these numbers tend to be revised higher is not having a good morning as Eurostat has just revised Euro area GDP growth for the autumn of this year down from 0.2% to 0.1%
Michael has discovered something which I first reported on here nearly ten-years ago.
Since late 2017, the MPC has increased the policy rate by 50bp, in two 25bp steps. Consistent with MPC
guidance, the rise in the policy rate has been gradual and limited……………However, pass-through to retail interest rates – both deposit rates and lending rates – has been unusually small. Many household interest rates have barely changed.
Actually it is the reason why QE was introduced because policymakers thought that the large cuts in Bank Rate would do the trick but found that some interest-rates did move but others did not. Actually some rose as I recall credit card interest-rates rising from circa 17% to more like 19%. So it is nice to see Michael catching up with reality. Some of you may already be experiencing a version of this which is far from unexpected here.
It is a similar story for rates on new household time deposits: a rise of 15bp so far (roughly 30% of
the rise in Bank Rate), versus average pass-through of just above 100% in prior MPC hiking cycles.
It seems that those looking for deposits and savings have little or no faith in the Forward Guidance of the Bank of England. Also it pumped them full of liquidity with the latest version of that being the Term Funding Scheme and if we add up such schemes they are still providing some £137 billion of liquidity. Or to put it another way that means that banks and building societies have much less need to compete for deposits. It also directly leads into this.
The average rate on new mortgages (covering both fixed and variable rate loans) is up by only 10-15bp, roughly 30% of the rise in the appropriate mix of Bank Rate and swap rates.
Brighter members at the Bank of England will consider that to be quite a triumph.
Frankly the section on higher interest-rates just seems like hot air.
In that scenario, further UK monetary tightening – limited and gradual – probably will be needed over time.
Okay but not now ( unlike when they wanted to cut which was immediate)
However, the possibility that monetary tightening might be needed in the future does not necessarily mean
we need to tighten now
You may have noted how quickly the rises went from probable to possible and we quickly see they may vanish in a puff of smoke.
And as we have said before, the monetary
policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.
The farce that is Forward Guidance is a saga that no-one seems able to stop. Supposedly individuals and businesses are being helped in their planning by being informed of what the Bank of England intends to do with interest-rates. The most obvious problem is that when there was a response from the ordinary person via a higher uptake in fixed-rate mortgages the Bank of England then cut interest-rates in a sharp about turn. I never really imagined many would follow this outside of financial markets but that must have cut the number even further.
As to house prices we are reminded of the flawed nature of many of the indices which measure them by today’s extraordinary number from the Halifax.
The Investing Channel