“All bets are off” as the Bank of England holds a “secret” press conference

Today is the turn of the Bank of England to take centre stage. On a personal level it raises a wry smile as when I was a market maker in UK short sterling options (known as a local) on the LIFFE floor it was the most important day of the month and often make or break. At other times it has been a more implicit big deal. Actually there is no likely change to short-term interest-rates on the cards. Perusing my old stomping ground shows that in fact not much action is expected at all with a pretty flat curve out to March 2024 when maybe a rise to the giddy heights of 0.25% is expected. Personally I think there is a solid chance we will see negative interest-rates first but that is not how the market is set this morning. Also I note that volumes are not great suggesting they are not expecting much today either.

If course some may be “more equal than others” to use that famous phrase as the Monetary Policy Committee voted last night following one of the previous Governor’s ( Mark Carney) “improvements”. He was of the opinion that getting his Minutes and PR prepared was more important than the risk of the vote leaking. Whereas the reality is that central banks are in fact rather leaky vessels.

Nationwide

There will have been consternation at the Bank of England when this news arrived at its hallowed doors. From the BBC.

The UK’s biggest building society has tripled the minimum deposit it will ask for from first-time buyers. The Nationwide will lower its ceiling for mortgage lending to new customers in response to the coronavirus crisis.It said the change, from Thursday, was due to “these unprecedented times and an uncertain mortgage market”.

I do not know if the new Governor Andrew Bailey has the same sharp temper as his predecessor Mark Carney but if he does it would have been in display. After all policy is essentially to get the housing market going once we peer beneath the veneer. Nearly £118 billion of cheap funding ( at the Bank Rate of 0.1%) has been deployed via the Term Funding Scheme(s) to keep the housing market wheels oiled. Also the news looks timed to just precede the MPC meeting.

In terms of detail there it is aimed at first-time buyers which is only likely to anger the Governor more.

First-time buyers are likely to be the most significantly affected because they often have smaller amounts saved to get on the property ladder.

Nationwide has reduced the proportion of a home’s value that is willing to lend from 95% to 85%.

So for example, if a property costs £100,000, a new buyer would now need a £15,000 deposit rather than a £5,000 deposit.

If we look back in time this is a familiar feature of house price falls. As mortgage borrowing becomes more restrained that by its very nature tends to pull house prices lower. For larger falls then it usually requites surveyors to join the party by down valuing some properties which as they are pack animals can spread like wildfire. The quote below shows that the situation is complex.

Some lenders, such as HSBC, still have mortgages with a 90% loan-to-value ratio. However, there is more demand for that type of mortgage than many banks have the capacity to deal with at the moment, he said.

Policy

We have already seen an extraordinary set of moves here. We have a record low interest-rate of 0.1% which is quite something from a body which had previously assured us that the “lower-bound” was 0.5%. There is a link to today’s news from this because it was building societies like the Nationwide and their creaking IT systems which got the blame for this, although ironically I think they did us a favour.

Next comes a whole barrage of Quantitative Easing and Credit Easing policies. The headliner here is the purchases of UK bonds ( Gilts) which by my maths passed the £600 billion mark just before 2 pm yesterday as it progresses at a weekly rate of £13.5 billion. This means that they are implicitly financing the UK public-sector right now, something I pointed out when the Ways and Means issue arose. We see that as I note that the UK Debt Management Office has issued some £14.4 billion of new UK bonds or Gilts this week. Whilst the Bank of England did not buy any of these it did oil the wheels with its purchases which means that the net issuance figure is £900 million which is rather different to £14.4 billion. On that road we see how both the two-year yield ( -0.07%) and the five-year yield ( -0,02%) are negative as I type this. Even the fifty-year yield is a mere 0.38%.

There has also been some £15 billion of Corporate Bond buying so far. This policy has not gone well as so desperate are they to find bonds to buy that they have bought some of Apple’s bonds. Yes the company with the enormous cash pile. Also I sure the Danes are grateful we are supporting their shipping company Maersk as it appears to need it, but they are probably somewhat bemused.

As to credit easing I have already noted the Term Funding Scheme and there is also the Covid Financing Facility where it buys Commercial Paper. Some £16.3 billion has been bought so far. Those who like a hot sausage roll may be pleased Greggs have been supported to the tune of £30 million, although North London is likely to be split on tribal lines by the £175 million for Spurs.

Comment

These days central banks and governments are hand in glove. Operationally that is required because the QE and credit easing measures require the backing of the taxpayer via HM Treasury. More prosaically the Chancellor Rishi Sunak can borrow at ultra low levels due to Bank of England policies and will do doubt raise a glass of champagne to them. Amazingly some put on such powerful sunglasses that they call this independence. Perhaps they were the ones who disallowed Sheffield United’s goal last night.

However the ability to help the economy is more problematical and was once described as like “pushing on a string”. This is not helped by the issues with our official statistics as we not inflation has been under recorded as I explained yesterday as has unemployment ( it was 5% + not the 3.9% reported) and the monthly drop of 20.4% in GDP has a large error range too. Because of that I have some sympathy for the MPC but I have no sympathy for the “secret” press conference it is holding at 1 pm. Then its “friends” will be able to release the details at 2:30 pm with no official confirmation until tomorrow.

So there are two issues. That is a form of corruption and debases what is left of free markets even more. Next it is supposed to be a publicly accountable institution with transparent policy. Along the way it means that the chances of a more aggressive policy announcement have just risen or as the bookie says in the film Snatch.

All bets are off

My report card for the Bank of England in the Covid-19 crisis

The advent of the Corona Virus pandemic has seen the Bank of England expand its activity beyond what we already considered to be extraordinary levels. There has been very little criticism I think for two reasons. Many of the new moves are not understood especially by the mainstream media and also they like to copy and paste official communiques of which there have been plenty! So let us work our way through the new policies to see the state of play.

Financing the UK government’s borrowing

Last week we looked at two factors here. The first is the QE ( Quantitative Easing) purchases which are presently running at a weekly rate of £13.5 billion and have so far totalled £35 billion in this phase. This meant that last week the UK did this.

 if we allow for the Bank of England purchases we remain net buyers of the order of £1.3 billion.

So issued debt in gross terms but via the Bank of England bought more. That looks to be a similar situation for this week as it buys the same amount and the UK Debt Management Office plans to issue some £10 billion of UK Gilts in nominal terms. The amount raised will be more than that ( the surge in the Gilt market means the majority of Gilts trade over 100) but as you can see we look to be heading for a similar result.

So we can switch now to the result. On a basic level we see that the UK government can finance itself and at quite a rate as we are issuing debt at a rate of £12 billion or so a week. This is quite a rate! Also we are able to do so very cheaply as the fifty-year yield is 0.48% and the benchmark ten-year is 0.31% as I type this.

On a more minor level let me add in the Ways and Means account which some got so excited about at the end of last week. This is because it is likely to be smaller than the amounts above. I have just asked them for this week’s update.

Corporate Bonds

This is a much more awkward area for the Bank of England. That may be why in spite of Corporate Bond purchases being ongoing its data only goes up to April 1st! Actually the use of April Fools Day is appropriate in some ways and let me explain why. Regular readers will recall that last time the Bank of England struggled to find corporate bonds to buy and ended up buying the Danish shipping company Maersk. No doubt it and the Danish government were grateful.

Well on today’s list are that well know UK technology company Apple as well as IBM. Whilst you could make a case for buying BMW via the Mini operations here will the Bank of England be racing the ECB to buy its bonds? Anyway the operation will provide us with plenty of amusement over time if history is any guide.

Covid Corporate Financing Facility

Let me open with the scale of the operation so far.

Total amount of CP purchased since 02 April
£3.626bn (data as at close 8 April 2020).

It seems worthy enough but as we look at the details I start to get troubled.

The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.

Term Funding Scheme

This has a new incarnation as after all we must keep supporting The Precious.

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

I wonder how they would define fake economy lending? We may yet find out. Anyway as is typical the help for smaller businesses is not yet in play so this is something of a fail and may yet be a grand fail as there are signs that more than a few businesses have folded already.

One thing that finally swung my partners into throwing up their hands and decide retiring was preferable was the hoops we’d have had to jump through to raise money at short notice. ( @MattBrookes3)

There are other reports of problems in funding getting to smaller businesses.

Gary Crosbie wants to keep his staff on, but like other small firms, his profitable business now faces running out of cash owing to the coronavirus shutdown.

Mr Crosbie runs Inter-Refurb, which refurbishes pubs, hotels and restaurants.

He says he can demonstrate three years of profits, with £50,000 cash in the bank.

Yet because his bank decided it didn’t wish to support the construction industry, he failed the test that required banks only to lend according to their pre-shutdown criteria. He was rejected for a government-backed loan last week. ( Andy Verity of the BBC)

There is quite a contrast here between smaller businesses who need money now but are not getting it and The Precious who still have some £107 billion from the previous Term Funding Scheme in their coffers.

Mortgages

There are mortgage holidays in play so let us look as those as after all it is the area about which the Bank of England is most concerned if its track record is any guide.

Lenders have provided over 1.2 million mortgage payment holidays to households whose finances have been impacted by Covid-19, UK Finance has revealed today.

On 17 March, just under a month ago, mortgage lenders announced they would support customers facing financial difficulties due to the Covid-19 crisis. Three weeks later, by Wednesday 8 April, over 1.2 million mortgage borrowers had been offered a payment holiday by their lender.

The action taken by lenders means that one in nine mortgages in the UK are now subject to a payment holiday, helping households across the country through this difficult time. For the average mortgage holder, the payment holiday amounts to £260 per month of suspended interest payments, with many benefitting from the option of extending the scheme for up to three months. ( UK Finance)

However that starts to look like PR spinning when we note this.

And once credit card or mortgage payment holidays end (1 in 9 of us have the latter), we’ll have more debt to pay off – because what isn’t talked about enough is that interest charges will still being calculated – and then added to the amount owed. ( @GCGodfrey)

Here is a song for the banks from Hot Chocolate.

So you win again, you win again
Here I stand again, the loser.

US Dollar Liquidity Swaps

These are proving to be a success on two fronts. Firstly US Dollars are available and secondly the amounts required have been falling. At the peak some US $37.7 billion required but as of yesterday that had fallen to US $21.9 billion.

Comment

As you can see there are various layers here. If we start with what has become the modus operandi for QE which is facilitating and financing government spending then it is a success. The UK can borrow both in size and extremely cheaply right now. That is a good idea for the crisis but of course we know that such things have a habit of becoming permanent and then the issue changes.

Next we see that larger companies will be pleased with the Bank of England action including some foreign ones. This creates problems because whilst I do not want companies to fail because of cash flow issues created by the pandemic we arrive yet again at the Zombie businesses issue. One of the reasons we spent so much time in the credit crunch was that the march of the Zombies just carried on and on and on. In this category we can class the banks because in spite of the “resilient” rhetoric and all the support we see that we are invested in Royal Bank of Scotland at around a fiver compared to a share price of £1.10.

Smaller companies will be wondering when the help will start? Let me take you back to March 26th.

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks.

As to mortgage lending we see that the banks will be getting liquidity at 0.1%, but they are piling debt excuse me help on borrowers at a lot higher rate.

So it is a patchy report card where there are successes but they are not reaching the ordinary person or business. Reality contrasts starkly with the words of Governor Carney from the 11th of March.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

 

 

A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

Unsecured credit and mortgage lending market will be the winners after the Bank of England move

Today has arrived with an event we have been expecting but the timing was a few days early. Those walking past the Bank of England building in Threadneedle Street early this morning may have got a warning from the opening of Stingray being played on the wi-fi stream.

Stand by for action!

Anything can happen in the next 30 minutes

Before the equity and Gilt markets opened it announced this.

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. …..The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.

So we see that yesterday morning’s equity market falls put the Bank of England into a state of panic. We also see why the UK Pound £ was weak on the foreign exchanges late yesterday as the news seems to have leaked giving some an early wire. The “improvement” announced by Governor Carney of voting the night before should be scrapped. But as we look at the statement the “help to” suggests a lack of conviction and was followed by this.

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

Okay the first sentence covers a lot of ground. Firstly it implicitly agrees with our theme that banks struggle to reduce interest-rates for ordinary depositors as we approach 0%, we have seen this in places with negative interest-rates. That also means that there is an opportunity to give the banks known under the code phrase “The Precious! The Precious!” at the Bank of England yet another subsidy estimated at the order of £100 billion.

Term Funding Scheme

We have had one of these before as it was initially introduced the last time the Bank of England panicked back in August 2016. It too like its predecessor the Funding for Lending Scheme was badged as being for small and medium-sized businesses but the change of name to the acronym TFSME gives us the clearest clue as to its success. after all successes like Coca-Cola keep the same name whereas leaky nuclear reprocessing plants like Windscale get called Sellafield.

So let me go through the scheme firstly with the Bank of England rhetoric and secondly with what happened last time.

help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;

Mortgage rates fell to record lows providing yet another boost to house prices, building companies and estate agents.

provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;

Unsecured lending went through the roof going on a surge that has continued as can you think of anything else in the economy growing at 6% per annum? You do not need to take my word for it as the Bank of England cake trolley will not be going near whoever wrote this in the latest Money and Credit report.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

Let me now give you the numbers for business borrowing. Now the FLS and the first TFS are now flowing anymore but the numbers are in fact better than hat we sometimes saw when they were.

Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

Oh and in line with the dictum that old soldiers never die they just fade away if you look at the Bank of England balance sheet the Term Funding Scheme still amounts to £107 billion.

Numbers bingo!

We can see this from two perspectives as a rather furious soon to be Governor of the Bank of England Andrew Bailey was given this to announce.

The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Once I had stopped laughing at the ridiculousness of this number I had two main thoughts. Firstly I guess he had to announce something as he had been robbed of rewarding the government with an interest-rate cut later this month. But next remember how we keep being told how we have more secure and indeed “resilient” banks? That seems to have morphed into this.

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020.

So yet another disaster for Forward Guidance! It actively misleads…

Comment

After all the Forward Guidance from Bank of England Governor Mark Carney about higher interest-rates he is going to leave them lower ( 0.25%) than when he started ( 0.5%). That about sums up his term in office as those like the Financial Times who called him a “rock star” Governor hope we have shirt memories. Also I have had many debates on social media with supporters of the claims that the Bank of England is politically independent. After an interest-rate cut to record lows on UK Budget Day I suspect they will be very quiet today. After all even Yes Prime Minister did not go quite that far! Indeed the Governor confirmed it in his press conference.

“We have coordinated our moves with the Chancellor in the Budget”

Actually there was also a Dr.Who style vibe going on as we had two Governors at one press conference.

More fundamentally there is the issue that interest-rate cuts at these levels may even make things worse. I am afraid our central planners have little nous and imagination and go for grand public gestures rather than real action. After all if you are short on staff because they are quarantined due to the Corona Virus what use is 0.5% off your borrowing costs? The latter of course assumes the banks pass it on.

As to ammunition left well the present Governor has established the lower bound for them at 0.1% ( hoping we will forget he previously claimed it was 0.5% before cutting below it). Will that survive him? It is hard to say because the real issue here is not you or I ot even business it is “The Precious” who they fear cannot take lower rates. That is the real reason for all the Term Funding Schemes and the like. However Monday did bring a curiosity as the Bank of England bought a Gilt with a yield of -0.025% so maybe it is considering plunging below zero.

Meanwhile there was something else curious today and the PR office of the Bank of England in an unusual turn may be grateful to me for pointing it out, But this was the sort of thing that used to make it cut interest-rates.

Gross domestic product (GDP) showed no growth in January 2020……The economy continued to show no growth overall in the latest three months.

No-one but the most credulous ( Professors of economics and those hoping to or previously having worked at the Bank of England) will believe that was the cause but it is a curious turn of events.

Meanwhile let us look at the term of Mark Carney via some music. Remember when he mentioned Jake Bugg? Well he would hope we would think of today’s move as this.

But that’s what happens
When it’s you who’s standing in the path of a lightning bolt

Whereas most will be humming The Smiths.

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?

What policy action can we expect from the Bank of England?

As to world faces up to the economic effects of the Corona Virus pandemic there is a lot to think about for the Bank of England. Yesterday it put out an emergency statement in an attempt to calm markets and today it will already have noted that other central banks have pulled the interest-rate trigger.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. ( Reserve Bank of Australia).

There are various perspectives on this of which the first is that it has been quite some time since the official interest-rate that has been lower than in the UK. Next comes the fact that the RBA has been cutting interest-rates on something of a tear as there were 3 others last year. As we see so often, the attempt at a pause or delay did not last long, and we end up with yet another record low for interest-rates. Indeed the monetary policy pedal is being pressed ever closer to the metal.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years.

Also in the queue was a neighbour of Australia.

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.75 percent and 2.25 percent, respectively.

So there were two interest-rate cuts overnight meaning that there have now been 744 in the credit crunch era and I have to add so far as we could see more later today. The problem of course is that in the current situation the words of Newt in the film Aliens come to mind.

It wont make any difference

It seems that those two central banks were unwilling to wait for the G7 statement later and frankly looking at it I can see why.

– G7 Now Drafting Statement On Coronavirus Response For Finance Leaders To Issue Tuesday Or Wednesday – Statement As Of Now Does Not Include Specific Language Calling For Fresh Fiscal Spending Or Coordinated Interest Rate Cuts By Central Banks – RTRS Citing G7 Source ( @LiveSquawk )

The truth is G7 are no doubt flying a cut to see how little they can get away with as monetary ammunition is low and fiscal policy takes quite some time to work. A point many seem to have forgotten in the melee.

The UK Economy

The irony of the present situation is that the UK economy was recovering before this phase.

Manufacturing output increased at the fastest pace since
April 2019, as growth strengthened in both the consumer
and intermediate goods sectors. In contrast, the downturn
at investment goods producers continued. The main factor
underlying output growth was improved intakes of new
work. Business optimism also strengthened, hitting a nine month high, reflecting planned new investment, product
launches, improved market conditions and a more settled
political outlook. ( IHS Markit )

This morning that was added to by this.

UK construction companies signalled a return to business
activity growth during February, following a nine-month
period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a postelection improvement in business confidence and pent-up demand for new projects. ( IHS Markit)

If there is a catch it is that we have seen the Markit PMI methodology hit trouble recently in the German manufacturing sector so the importance of these numbers needs to be downgraded again.

Monetary Conditions

As you can see the situation looks strong here too as this from the Bank of England yesterday shows.

Mortgage approvals for house purchase rose to 70,900, the highest since February 2016.

The annual growth rate of consumer credit remained at 6.1% in January, stabilising after the downward trend seen over past three years.

UK businesses made net repayments of £0.4 billion of finance in January, driven by net repayments of loans.

Please make note of that as I will return to it later. Now let us take a look starting with the central banking priority.

Mortgage approvals for house purchase (an indicator for future lending) rose to 70,900 in January, 4.4% higher than in December, and the highest since February 2016. This takes the series above the very narrow range seen over past few years.

Actual net mortgage lending at £4 billion is a lagging indicator so the Bank of England will be expecting this to pick up especially if we note current conditions. This is because the five-year Gilt yield has fallen to 0.3%. Now conditions are volatile right now but if it stays down here we can expect even lower mortgage rates providing yet another boost for the housing market.

Next we move to the fastest growing area of the economy.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

As you can see the slowing has stopped and been replaced by this.

These growth rates represent a £1.2 billion flow of consumer credit in January, in line with the £1.1 billion average seen since July 2018.

Broad money growth has been picking up too since later last spring and is now at 4.3%.

Total money holdings in January rose by £9.4 billion, primarily driven by a £4.2 billion increase in NIOFC’s money holding.

The amount of money held by households rose by £2.8 billion in January, compared to £3.3 billion in December. The amount of money held by PNFCs also rose by £2.3 billion.

Comment

The numbers above link with this new plan from the ECB.

Measures being considered by the ECB include a targeted longer-term refinancing operation directed at small and medium-sized firms, which could be hardest hit by a virus-related downturn, sources familiar with the discussion told Reuters. ( City-AM)

You see when the Bank of England did this back in 2012 with the Funding for Lending Scheme it boosted mortgage lending and house prices. Where business lending did this.

UK businesses repaid £4.1 billion of bank loans in January. This predominantly reflected higher repayments. These weaker flows resulted in a fall in the annual growth rate of bank lending to 0.8%, the weakest since July 2018. Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

I think that over 7 years is enough time to judge a policy and we can see that like elsewhere ( Japan) such schemes end up boosting the housing market.

It also true that the Bank of England has a Governor Mark Carney with a fortnight left. But he has been speaking in Parliament today.

BANK OF ENGLAND’S CARNEY SAYS SHOULD EXPECT A RESPONSE THAT HAS A MIX OF FISCAL AND CENTRAL BANK ELEMENTS

BANK OF ENGLAND’S CARNEY SAYS EXPECT POWERFUL AND TIMELY GLOBAL ECONOMIC RESPONSE TO CORONAVIRUS ( @PrispusIQ)

That sounds like a lot of hot air which of course is an irony as he moves onto the climate change issue. I would imagine that he cannot wait to get away and leave his successor to face the problems created by him and his central planning cohorts and colleagues.

His successor is no doubt hoping to reward those who appointed him with an interest-rate cut just like in Yes Prime Minister.

 

 

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 gets ready for another cut interest-rate cut

Yesterday saw Bank of England Governor Mark Carney in full flow at the Bank of England itself in a type of last hurrah. I am grateful to him for being kind enough to exhibit at least 4 of the themes of this blog in one go! That is quite an achievement even for him. I will start by looking at something of a swerve which was introduced by the then Chancellor George Osborne and it has never received the prominence I think it deserves.

A major improvement to the inflation targeting framework itself was to confirm explicitly beginning with the
2013 remit that the MPC is required to have regard to trade-offs between keeping inflation at the target and
avoiding undesirably volatility in output. In other words, the MPC can use the full flexibility of inflation
targeting in the face of exceptionally large shocks to return inflation to target in a manner that provides as
much support as possible to employment and growth or, if necessary, promotes financial stability.

I make the point because you could argue from that date the Bank of England was acknowledging that its priority was no longer inflation targeting. Some of this was accepting reality as back in 2010 it had “looked through” inflation over 5%. To be more specific it is now concerned about inflation under target but much less so if it is above it. This is confirmed in the speech in part of the section on the period after the EU Leave vote.

Inflation rose well above the 2% target, eventually peaking at 3.1% in late 2017, an overshoot entirely due to
the referendum-induced fall in sterling.
UK growth dropped from the fastest to the slowest in the G7.

He cut interest-rates in this period in spite of the fact that the lower UK Pound £ meant that inflation would go in his words well above the 2% target. Actually tucked away on the speech is something of a confession of this.

In the wake of the referendum, the MPC’s
aggressive monetary easing, despite a sharply depreciating currency and rising inflation,

The Unreliable Boyfriend

It seems he cannot escape behaving like this and this week he has given us a classic example. We only need to go back to Wednesday for this.

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

Yet a mere 24 hours or so later things were really rather different.

Of course, the effectiveness of unconventional policies means that there is considerable total policy space.
In the UK, the MPC can increase its purchases of both gilts and corporate bonds, providing stimulus through
a number of channels including portfolio rebalancing……..All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

Glen Campbell must be a bit disappointed as he famously took 24 hours to get to Tulsa whereas Governor Carney has managed the road to Damascus in the same time. Perhaps the new Governor Andrew Bailey had been on the phone. Anyway however you spin it “running out of ammunition” morphed into “considerable total policy space”.

Cutting Interest-Rates

Regular readers will be aware that I have been suggesting for a while now that the next move from the Bank of England will be to return us to a 0.5% Bank Rate. This was regarded as an emergency official interest-rate at the time but as so often language has been twisted and manipulated as it turned out to be long-lasting. I will discuss Forward Guidance in detail in a moment but for the moment let us just remind ourselves that Mark Carney has regularly promised interest-rate rises during his Governorship. Whereas yesterday we were given a hint of another U-Turn.

This rebound is not, of course, assured. The economy has been sluggish, slack has been growing, and
inflation is below target. Much hinges on the speed with which domestic confidence returns. As is entirely
appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the
expected recovery in UK growth and inflation.

For newer readers central bankers speak in their own language and in it this is a clear hint of what is on its way.

Forward Guidance

The Governor cannot avoid a move which backfired rather quickly in his term.

The message the Committee gave UK households and businesses was simple: the MPC would not even
think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs.

The simple sentence below must have stung as he wrote it and later spoke it.

In the event, the unemployment rate fell far faster than the MPC had expected, falling below 7% in February
2014.

I will spare you the re-writing of history that the Governor indulges in but he cannot avoid confirming another issue I have raised many times.

As part of these exercises, the MPC revised down its (hitherto private) estimate of equilibrium unemployment rate from 6½% in August 2013 to 5½% in August 2014,

Actually the “hitherto private” claim is not true either as we knew. Also the equilibrium unemployment rather according to the Bank of England continued to fall and is now 4.25%. Thus as a concept it is effectively meaningless not only because it became a laughing stock but it’s use as an anchor was undermined by all the changes.

Anyway as we approach the end of the week it is opportune to have some humour, at least I hope this is humour.

 People understood the conditionality of guidance, as they and the MPC had learnt that there was still considerable
spare capacity in the economy.

I do love the idea that the (wo)man on the Clapham Omnibus had any idea of this! For a start it would have left them better informed than the Governor himself.

Inflation Targeting

I have argued many times that it needs reform and a major part of this should be to realise the influence of asset prices both pre and post credit crunch. On that road house prices need to go into the consumer inflation measure.

But apparently things have gone rather well.

This performance underscores that the bar for changing the regime is high.

I am not sure where to start with this.

Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

After all the Bank of England’s own survey told us this only last month.

 Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.6%, up from 3.1% in August.

Comment

We can continue the humour with some number crunching Mark Carney style.

At present, there is sufficient headroom to at least
double the August 2016 package of £60 billion asset purchases, a number that will increase with further gilt
issuance. That would deliver the equivalent of around a 100 basis point cut to Bank Rate on top of the near
75 basis points of conventional policy space. Forward guidance at the ELB adds to this armoury. All told, a
reasonable judgement is that the combined conventional and unconventional policy space is in the
neighbourhood of the 250 basis points cut to Bank Rate seen in pre-crisis easing cycles.

So if 1% is from QE and 0.65% from an interest-rate cut to his “lower bound” of 0.1% then that means he is claiming that Forward Guidance can deliver the equivalent of 0.85% of interest-rate cuts. That really is something from beyond even the outer limits of credibility. Oh and I have no idea why he says “near 75 basis points of conventional policy space” when it is 0.65%.

As I have been writing this article a fifth theme of mine has been in evidence which is that these days Monetary Policy Committee members only seem to exist to say ” I agree with Mark”.

“If uncertainty over the future trading arrangement or subdued global growth continued to weigh on UK demand then my inclination is towards voting for a cut in bank rate in the near term,” she says. ( The Guardian)

That is Silvano Tenreyro who has rushed to be in line and it is especially disappointing as she is an external member. It is the internal members that have historically been the Governor’s lapdogs.

Has there been a more unreliable boyfriend than Mark Carney?

After looking this week at the trend toward negative interest-rates and the establishment lust for higher inflation today we can take a look at some of the case for their defence. It comes from Bank of England Governor Mark Carney and he will be relaxed as he has been able to do so in its house journal the Financial Times. Although I note that even it does not label him as a “rock star” central banker anymore and there does not seem to be any mention of film star good looks. Mind you film stars I guess are not what they were after this from Stella McCartney after the Golden Globes.

This man is a winner… wearing custom Stella because he chooses to make choices for the future of the planet. He has also chosen to wear this same Tux for the entire award season to reduce waste. I am proud to join forces with you… x Stella #JoaquinPhoenix
#GoldenGlobes

Saving the planet one tux at a time.

Monetary Policy

Governor Carney opens with this.

The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

As ever he is trying to lay a smoke screen over reality so let us break this down. Actually we have been in a type of “liquidity trap” for quite some time now. A major driver of it has in fact been central banking terror of a future recession which means that zombie companies and especially banks have been propped up. There has been little or none of the “creative destruction” of Josef Schumpeter where capitalism clears up many of its failures. Bad at the time but it also provides some of the fertile ground for new companies and growth. The deflection element is that by claiming a liquidity trip is in the future it deflects from his role in where we are now.

Er, who fired the ammunition?

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

If we look at it we see that if we just look at interest-rates there is 0.65% left according to Governor Carney. That is the current 0.75% Bank Rate to his view of the lower bound which was 0.5% but is now 0.1%. Sadly he is not challenged on this allowing him to imply this is a worldwide problem.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

An opportunity was missed here to expose the Governor’s rather odd thinking. The blanket view that there is less ammunition has sub-plots. For example the European Central Bank or ECB has an interest-rate of -0.5% and considered -0.6% and yesterday we looked at the Swiss National Bank with its -0.75% official interest-rate. So suddenly we have up to an extra 0.85% compared to his “lower bound”. Also the ECB and SNB could cut further.

I am not sure the explanation about a liquidity trap helps much as it describes a situation we have been in for some time.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

Somehow the editor of the FT Lionel Barber and its economics editor Chris Giles seem to have missed that the credit crunch era has seem many examples of a liquidity trap as highlighted by the use of “rare occasions”

Alternatives

Is there any other sphere where people who have asked for tools used them far more than expected but with little success would be given even more powers?

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

It is nice that the FT below confirms the central banking group think or if you prefer they borrow the same brain cell.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

Also this is something that Paloma Faith sang about.

I’ll tell you what (I’ll tell you what)
What I have found (what I have found)
That I’m no fool (that I’m no fool)
I’m just upside down (just upside down)

Central banks were supposed to be independent and run monetary policy yet a confession of failure seems to make them think they can tell elected politicians what to do. I would call it mission creep but it is more of a leap than a creep.

But I’m a creep, I’m a weirdo
What the hell am I doing here?
I don’t belong here
I don’t belong here ( Radiohead )

Mind you the unreliable boyfriend seems to be having doubts about his commitment to his own statement.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

Indeed suddenly we find that his successor has loads of room.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

“The Precious! The Precious!”

Oh and weren’t we raising the banks capital requirements to make the system safer? The unreliable boyfriend does seem to enjoy a U-Turn.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Being the FT the failures of his initial period of tenure get skated by.

Demand returned in 2013, just as he took up his position.

The 7% unemployment rate debacle gets a new spin.

how many people could be employed without inflation

I am sure that readers think it is really unfair that the Bank of England had to deal with a changing situation.

The monetary policy committee also had to grapple with structural difficulties

I like the use of “grapple” to describe confusion and inertia as it would be hard to be more misleading. The reality is that the chance to raise interest-rates around 2014 was missed and the boat sailed with the Governor still on the shore dithering over whether to buy a ticket.

Comment

It is perhaps most revealing that the Governor sets out the challenges for the Bank of England without mentioning monetary policy at all.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

Also there seems to be some form of amnesia about the fact that Governor Carney got into trouble for playing politics when he was at the Bank of Canada.

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job. “This role is just much more public than the same role in Canada,” said Mr Carney.

Oh and did I mention mission creep?

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

The Investing Channel

Andrew Bailey’s appointment as Governor shows yet again how accurate Yes Prime Minister was

The pace of events has picked up again as whilst there is much to consider about the likely UK public finances something else has caught the eye.

Today, 20 December 2019, the Chancellor has announced that Andrew Bailey will become the new Governor of the Bank of England from 16 March 2020. Her Majesty the Queen has approved the appointment.

In order to provide for a smooth transition, the current Governor, Mark Carney, has agreed to now complete his term on 15 March 2020.

Making the announcement the Chancellor said: “When we launched this process, we said we were looking for a leader of international standing with expertise across monetary, economic and regulatory matters. In Andrew Bailey that is who we have appointed.

Andrew was the stand-out candidate in a competitive field. He is the right person to lead the Bank as we forge a new future outside the EU and level-up opportunity across the country.

It is hard not to have a wry smile at Governor Carney getting yet another extension! I think we have predicted that before. As to Andrew Bailey I guess that the delay means he will be busy in his present role as head of the Financial Conduct Authority covering up yesterday’s scandal at the Bank of England before he can move over. A new definition of moral hazard straight out of the Yes Prime Minister play book. There is the issue of the scandals he has overlooked or been tardy dealing with in his time at the FCA but there is something even more bizarre which was in the Evening Standard in 2016 and thank you to Kellie Dawson for this.

I was interested in the story of Andrew Bailey, new Bank of England chief battling a bear. Turns out his WIFE battled the bear while he was on the phone. Rolls knowing eyes at all women everywhere.

Economic Growth

There was also some good news for the UK economy this morning.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2019, revised upwards by 0.1 percentage points from the first quarterly estimate…..When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 3 2019; revised upwards by 0.1 percentage points from the previous estimate.

So still an anaemic rate of annual growth but at these levels every little helps. One of the ironies in the Brexit situation is that annual growth is very similar as the Euro area is at 1.2%. As to the UK detail there is this.

Services output increased by a revised 0.5% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Manufacturing grew by 0.1% in Quarter 3 2019, as did production output. Construction output experienced a pickup following a weak Quarter 2 (Apr to June), increasing by 1.2%

So the “march of the makers” has in fact turned out to be the opposite of the “rebalancing” promised by the former Bank of England Governor Baron King of Lothbury. As I regularly point out services are becoming an ever larger component of UK GDP.

Also for once there was good news from the trade position.

The current account deficit narrowed to 2.8% of GDP in Quarter 3 2019, its lowest share of GDP since early 2012,

That is obviously welcome but there is a fly in this particular ointment as they seem to be splashing around between trade and investment.

The latest figures mean that net trade is now estimated to have added 1.2 percentage points to GDP growth over this period compared with the almost flat contribution in the previous estimate.

Gross capital formation is now estimated to have subtracted 1.2 percentage points from GDP growth since Quarter 1 2018 compared with the negative contribution of 0.5 percentage points previously recorded.

Also UK business investment over the past year has been revised up from -0.6% to 0.5% which is quite a change and deserves an explanation.

Public Finances

There were some announcements about future government spending in the Queen’s Speech yesterday. From the BBC.

Schools in England are promised more funding, rising by £7.1bn by 2022-23, which the Institute for Fiscal Studies think tank says will reverse the budget cuts of the austerity years.

Also there was this about the NHS.

The five-year plan, which sees the budget grow by 3.4% a year to 2023, was unveiled last year and was included in the Tory election manifesto.

The proposal to help on business rates was more minor than badged so we are seeing something of a mild fiscal expansion that the Bank of England thinks will add 0.4% to GDP. So can we afford it?

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of November 2019 was £1,808.8 billion (or 80.6% of gross domestic product (GDP)), an increase of £39.4 billion (or a decrease of 0.8 percentage points) on November 2018.

As you can see whilst the debt is rising in relative terms it is falling and if we take out the effect of Bank of England policy it looks better.

Debt at the end of November 2019 excluding the Bank of England (mainly quantitative easing) was £1,626.6 billion (or 72.5% of GDP); this is an increase of £46.9 billion (or a decrease of 0.2 percentage points) on November 2018.

I am not sure why they call in QE when it is mostly the Term Funding Scheme but as regular readers will be aware there seems to be a lack of understanding of this area amongst our official statisticians.

It also remains cheap for the UK to borrow with the benchmark ten-year Gilt yield at 0.82% and more relevantly the 50-year yield being 1.2%. We have seen lower levels but as I have seen yields as high as 15% we remain in a cheaper phase.

Current Fiscal Stimulus

The UK has been seeing a minor fiscal stimulus which has been confirmed again by this morning’s data.

Borrowing in the current financial year-to-date (April 2019 to November 2019) was £50.9 billion, £5.1 billion more than in the same period last year; this is the highest April-to-November borrowing for two years (since 2017), though April-to-November 2018 remains the lowest in such a period for 12 years (since 2007).

If we go the breakdown we see this.

In the latest financial year-to-date, central government receipts grew by 2.1% on the same period last year to £485.7 billion, including £356.5 billion in tax revenue.

Over the same period, central government spent £514.6 billion, an increase of 2.8%.

With the rate of inflation declining we are now seeing increases in public spending in real terms and they may well build up as we have not yet seen the full budget plans of the new government.

Care is needed however as the numbers have developed a habit of getting better over time.

PSNB ex in the financial year ending March 2019 has been revised down by £3.3 billion compared with figures presented in the previous bulletin (published on 21 November 2019) as a result of new data.

Comment

We are at times living an episode of Yes Prime Minister as proved by the appointment of the new Governor.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

 

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

 

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

 

Is that why I’ve been invited to consult him about this governorship?

Sir Desmond would be called a “safe pair of hands” too and no doubt would also have run into all sorts of issues if he had been in charge of the FCA just like Andrew Bailey has. Favouring banks, looking the other way from scandals and that is before we get to the treatment of whistle blowers. I do not recall him ever saying much about monetary policy.

Also the timing has taken yesterday’s scandal at the Bank of England off the front pages again like something straight out of Yes Prime Minister. We will never know whether this announcement was driven by that. However should it continue to be so accurate we can expect this next.

If I can’t announce the appointment of Mr Clean as Governor –
Why not announce a cut in interest rates?
Oh, don’t be silly, I What? Announce a cut in interest rates The Bank couldn’t allow a political cut – particularly with Jameson.
It would with Desmond Glazebrook.
Now, if you appoint him Governor, he’ll cut Bartlett’s interest rates in the morning – you can announce both in your speech.
– How do you know?
He’s just told me.

A Bank of England interest-rate cut is now in play

This certainly feels like the morning after the night before as the UK has a new political landscape. The same party is the government but now it is more powerful due to the fact it has a solid majority. As ever let us leave politics and move to the economic consequences and let me start with the Bank of England which meets next week. Let us remind ourselves of its view at its last meeting on the 7th of November.

Regarding Bank Rate, seven members of the Committee (Mark Carney, Ben Broadbent, Jon Cunliffe, Dave
Ramsden, Andrew Haldane, Silvana Tenreyro and Gertjan Vlieghe) voted in favour of the proposition. Two
members (Jonathan Haskel and Michael Saunders) voted against the proposition, preferring to reduce Bank
Rate by 25 basis points.

That was notable on two fronts. The votes for a cut were from external ( appointed from outside the Bank of England ) members. Also that it represented quite a volte face from Michael Saunders who regular readers will recall was previously pushing for interest-rate increases. Staying with the external members that makes me think of Gertjan Vlieghe who is also something of what Americans call a flip-flopper.

What has changed since?

The UK Pound

At the last meeting the Bank of England told us this.

The sterling exchange rate index had
increased by around 3% since the previous MPC meeting, and sterling implied volatilities had fallen back
somewhat,

So monetary conditions had tightened and this has continued since. The effective or trade weighted index was 79 around then whereas if we factor in the overnight rally it could be as high as 83 when it allows for that. In terms of individual currencies we have seen some changes as we look at US $1.34, 1.20 versus the Euro and just under 147 Yen.

This represents a tightening of monetary conditions and at the peak would be the equivalent of a 1% rise in Bank Rate using  the old Bank of England rule of thumb. Of course the idea of the current Bank of England increasing interest-rates by 1% would require an episode of The Outer Limits to cover it but the economic reality is unchanged however it may try to spin things. Also this is on top of the previous rise.

Inflation

There are consequences for the likely rate of inflation from the rise of the Pound £ we have just noted. The Bank of England was already thinking this.

CPI inflation remained at 1.7% in September
and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated
energy and water prices.

There are paths now where UK CPI inflation could fall below 1% meaning the Governor ( presumably not Mark Carney by then) would have to write an explanatory letter to the Chancellor.

A factor against this is the oil price should it remain around US $65 for a barrel of Brent Crude Oil but even so inflation looks set to fall further below target.

Also expectations may be adjusting to lower inflation in the offing.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in August.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.1%, down from 3.3% in August.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, down from 3.0% in August.    ( Bank of England this morning)

It is hard not to have a wry smile at the fact that those asked plainly are judging things at RPI type levels.

Gilt Yields

These have been rising driven by two factors. They have been rising generally across the developed world and an additional UK factor based at least partly on the likelihood of a higher fiscal deficit. The ten-year Gilt yield is 0.86% but more relevant for most as it influences fixed-rate mortgages is the five-year which is 0.64%.

The latter will bother the Bank of England as higher mortgage-rates may affect house prices adversely.

The economy

There was a time when Bank of England interest-rate moves fairly regularly responded to GDP data. Food for thought when we consider this week’s news.

The UK economy saw no growth in the latest three months. There were increases across the services sector, offset by falls in manufacturing with factories continuing the weak performance seen since April.

Construction also declined across the last three months with a notable drop in house building and infrastructure in October.

There is a swerve as they used to respond to quarterly GDP announcements whereas whilst this is also for 3 months it is not a formal quarter. But there is a clear message from it added to by the monthly GDP reading also being 0%.

Last week the Markit business survey told us this.

November’s PMI surveys collectively suggest that the UK
economy is staggering through the final quarter of 2019,
with service sector output falling back into decline after a
brief period of stabilisation……….Lower manufacturing production alongside an absence of growth in the service economy means that the IHS Markit/CIPS Composite Output Index is consistent with UK GDP declining at a quarterly rate of around 0.1%.

The Bank of England has followed the path of the Matkit business surveys before. Back in the late summer of 2016 the absent minded professor Ben Broadbent gave a speech essentially telling us that such sentiment measures we in. Although the nuance is that it rather spectacularly backfired ( the promised November rate cut to 0.1% never happened as by then it was apparent that the survey was incorrect) and these days even the absent minded professor must know that as suggested below.

Although business survey indicators, taken together, pointed to a contraction in GDP in Q4, the relationship between survey responses and growth appeared to have been weaker at times of uncertainty and some firms may have considered a no-deal Brexit as likely when they had
responded to the latest available surveys.

It is hard not to think that they will expect this to continue this quarter and into 2020.

Looking through movements in volatile components of GDP, the Committee judged that underlying growth
over the first three quarters of the year had been materially weaker than in 2017 and 2018.

Comment

If we look at the evidence and the likely triggers for a Bank of England Bank Rate cut they are in play right now. I have described above in what form. There are a couple of factors against it which will be around looser fiscal policy and a possible boost to business investment now the Brexit outlook is a little clearer. Policies already announced by the present government were expected to boost GDP by 0.4% and we can expect some more of this. Even so economic growth looks set to be weak.

Looking at the timing of such a move then there is an influence for it which is that it would be very Yes Prime Minister for the Bank of England to give the “new” government an interest-rate cut next week. Although in purist Yes Prime Minister terms the new Governor would do it! So who do you think the new Bank of England Governor will be?