The Bank of England has driven a surge in UK unsecured credit

Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.

Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.

But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.

The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
November meeting.

There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down

But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.

This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.

These are some of the issues that the MPC will debate in the coming months.

So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.

The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit
negotiations.

Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.

BOJ HARADA: NOT PLANNING TO REDUCE ETF PURCHASES UNTIL 2% INFLATION TARGET ACHIEVED – DJN

So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.

Pinocchio

I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.

Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.

Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.

Loans to small and medium-sized enterprises were broadly
unchanged

Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?

Buy To Lets

Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.

Today’s data

There is little sign of a slow down in this.

Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016

I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.

Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.

I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?

The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.

Comment

The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.

Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.

Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.

Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.

Indeed he took a swipe at well people like me.

Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.

As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

UK credit and car loan problems are building

As we look at the UK credit situation there are building pressures almost everywhere we look. This is hardly a surprise if we step back and review the years and years of easy monetary policy involving cutting the Bank Rate to a mere 0.25% and some £445 billion of QE ( Quantitative Easing) as well as other policies. If we stay with QE then the UK is second on the list in terms of how much of its bond ( Gilt) market has been bought by its central bank at 37% according to Business Insider. I doubt Governor Carney will be emphasising this too much when he presents the Financial Stability Report today.

Central bankers are capable of the most extraordinary blindness when it comes to themselves however as I noted when I received this in my email inbox.

Why are house prices in the UK so high? Can prices and mortgage debt continue to rise? How is government policy affecting outcomes? David Miles will explore these issues and consider how the property landscape in the UK might play out over the longer term.

This is the same David Miles who in his time at the Bank of England did as much as he could to drive house prices higher with his votes for Bank Rate cuts, more QE and the bank subsidy called the Term Funding Scheme. He even voted for more QE in the summer of 2013 as the UK economy picked up! Of course in his last month in the autumn of 2015 he claimed he was on the edge of voting for a Bank Rate rise but this only fooled the most credulous. The reality is that he was a major driver in creating this sort of situation. From April.

Yorkshire Building Society is launching a mortgage with the lowest interest rate ever available in the UK at 0.89%.

The new 0.89% product is a two-year variable mortgage with a discount of 3.85% from the Society’s Standard Variable Rate (SVR), which is currently 4.74%, and is available for anyone borrowing up to 65% of the value of their property.

Car Loans

This is another problem area that we have looked at several times due to two main factors. Firstly we have seen quite a rate of growth and secondly the market has changed massively. These days nearly all new cars are bought on credit as this from the Finance and Leasing Association makes clear.

In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

The deals look initially very attractive.

There are often 0% deals available, so it’s worth shopping around.

However there is a “rub” as Shakespeare would put it and we see the danger here as the Financial Times takes up the story..

Most borrowing is in the form of Personal Contract Purchases. Customers pay a deposit and monthly payments for a fixed period. At the end of the contract, they can buy the car from the manufacturer for a price guaranteed at the start.

The in-house banks of car companies, which provide most of the finance for PCPs, generally set this guaranteed price at about 85 per cent of what they think the used car will be worth.

We know that in the United States used car values have dropped sharply so let us look at the UK as the FT explains.

“However, the detail is the key,” said Rupert Pontin, director of valuations at Glass’s. Newer used-cars are losing more of their value and more quickly. A used car that is less than two-and-a-half years old is worth 57.6 per cent of its original value, down from 61.1 per cent in 2014.

“This is likely to continue to be the case for the rest of 2017 and into 2018 as well,” he said, as more cars come off the three-year credit deals they were bought with and that have been wildly popular with UK consumers.

So they are “Fallin'” as Alicia Keys would say. This poses quite a problem for a system which depends on the resale value of the cars. Initially this will probably hit the manufacturers who offer these schemes as those leasing will presumably hand more of the cars back. For deals going forwards though the resale value will be adjusted lower and be factored into the deal making the buyer/consumer get worse terms.

This has changed the car market

I have written in the past about a friend who bought a car and took a contract deal because believe it or not it was £500 cheaper than buying it outright. More is added on this front in a reply to the FT from leftie.

There’s no truth in the description ‘interest free’.  The cost of the loan is built into the ticket price.   We know that because the seller may not offer a discount on the sale price for fear of the ‘interest free’ bluff being found out.  It’s institutionalised dishonesty that traps the unwary and leads to excessive debts.

Whilst some do game the system most are unwary pawns.

I found it was cheaper to buy my small new Ford on PCP credit than pay cash, and the dealer admitted he would get more commission from the former.

Don’t worry, he told me: wait a couple of days for the systems to update then ring Ford and pay off the loan. I did, and accrued interest was negligible. Few people do this – it’s so tempting to hang on to your cash. ( johnwrigglesworth )

So the Merry Go Round rumbles on with the can as ever being kicked about 3/4 years each time. What could go wrong? From the FT.

Many car loans are securitised — packaged together and sold on to investors as bonds — as mortgages were in the run-up to the financial crisis. This has led some to worry that a slowdown in car sales could cause financial instability.

I have noticed something rather troubling this morning and let me make it clear that this is from the US and not the UK but of course such things tend to hop the Atlantic like it is a puddle and not an ocean.

 

This faces ch-ch-changes as explained by the Agents of the Bank of England last week.

Contacts reported a range of potential headwinds, including
the slowdown in real pay growth, upward pressure on new car prices arising from sterling’s depreciation and, for high-volume manufacturers, weaker second-hand car residual values, which had raised the costs of depreciation and so car finance.

Comment

If we start with the UK car market it has seen an extraordinary amount of stimulus. First came its own form of QE as redress payments from the Payments Protection Insurance scandal came into play and next came the easing of the Bank of England. No wonder sales have risen and not all of the drive came from the UK as some came from policies elsewhere as the FT explains.

Thrifty German savers in search of better interest rates have helped fund the debt-fuelled car-buying boom in the UK…..The biggest deposit taker is Volkswagen which had €28bn of consumer deposits in 2015, followed by BMW with €15.9bn. RCI Banque, the bank of Renault, had €13.6bn of deposits.

Meanwhile for Bank of England Governor Mark Carney it is clear that a week is apparently a long time in central banking. Last week we saw boasting.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows,

This week the Financial Stability Report tells a very different story.

Consumer credit has increased rapidly

Something to cheer like the Governor did? Er no.

Bringing forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress
test.

So perhaps not as we see a rise in the capital required by UK banks.

Increasing the UK countercyclical capital buffer rate to 0.5%, from 0%. Absent a material change in the
outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC
expects to increase the rate to 1% at its November meeting.

That will be two steps of £5.7 billion if the initial estimates are accurate as we note they have finally spotted something we started looking at last summer.

Consumer credit grew by 10.3% in the twelve months to
April 2017

 

Me in City AM

http://www.cityam.com/267366/debate-italian-government-right-commit-eur17bn-rescuing-two?utm_source=dlvr.it&utm_medium=dvTwitter

 

 

The Mark Carney experience at the Bank of England

This morning Mark Carney has given his Mansion House speech which was delayed due to the Grenfell Tower fire tragedy. One thing that was unlikely to be in the speech today was the outright cheerleading for the reform of the banking sector which was the basis of his speech back on the 7th of April as the news below emerged.

Barclays PLC and four former executives have been charged with conspiracy to commit fraud and the provision of unlawful financial assistance.

The Serious Fraud Office charges come at the end of a five-year investigation and relate to the bank’s fundraising at the height of 2008’s financial crisis.

Former chief executive John Varley is one of the four ex-staff who will face Westminster magistrates on 3 July.

Firstly let me welcome the news that there will be a trial although the conviction record of the Serious Fraud Office is not good. The problem is that this has taken around nine years about something ( £7 billion raised from Qatar ) which frankly looked to have dubious elements when it took place. What you might call  slooooooooooooow progress of justice.

What about UK interest-rates?

We first got a confession about something we discovered last week.

Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase.

Actually that is an odd way of saying it as five members voted for no change with some more likely to vote for a cut that a rise in my opinion. Although of course Mark Carney has had trouble before with rises in interest-rates which turn out to be cuts!

Next we got a confirmation of the Governor’s opinion.

From my perspective, given the mixed signals on consumer spending and business investment, and given
the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time
to begin that adjustment

Indeed he seems keen to kick this rather awkward issue – because it would mean reversing last August’s Bank Rate cut – as far into the future as possible.

In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.

Indeed if we are willing to ignore both UK economic history and the leads and lags in UK monetary policy then you might be able to believe this.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

Missing from the slap on the back that the Governor has given himself is the most powerful instrument of all which is the value of the UK Pound which has given the UK economy and more sadly inflation a boost. Indeed the initial response to the Governor’s jawboning was to add to the Pound’s fall as it fell below US $1.27 and 1.14 versus the Euro. Should it remain there then the total fall since the night of the EU leave vote then it is equivalent to a 2.75% fall in UK Bank Rate which is a bazooka compared to the 0.25% peashooter cut provided by the Bank of England. So if you believe Mark Carney you are likely not to be a fan of Alice In Wonderland.

“Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Also if he is going to take credit for er “Credit is widely available” then he will be on very thin ice when he next claims the surge in unsecured credit is nothing to do with him.

Carney’s Cronies

Ironically in a way the foreign exchange market was a day late as you see the real change came yesterday.

​The Chancellor of the Exchequer has announced the appointment of Professor Silvana Tenreyro as an external member of the Monetary Policy Committee (MPC).  Silvana will be appointed for a three year term which will take effect from 7 July 2017.

There are several issues here, if I start with British female economists then that is another slap in the face for them as none have been judged suitable for a decade. Next came the thought that I had never previously heard of her which turned to concern as we were told she came from “academic excellence” in an era where Ivory Towers have consistently crumbled and fallen along the lines of Mount Doom in the Lord of the Rings. But after a little research one could see why she had been appointed. From a survey taken by the Centre For Macroeconomics.

Question Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

Agree. Confident. Reforming the monetary system to allow negative policy interest rates will equip the BoE with an additional tool to face potential crises in the future.

Does “reforming the monetary system” sound somewhat like someone who will support restrictions on the use of cash currency and maybe its banning? She is also a fan of QE ( Quantitative Easing ) style policies.

Question Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of monetary policy under normal economic conditions?

Agree. Confident. A wider set of policy tools would give mature and credible central banks like the BoE more flexibility to respond to changing economic conditions.

What is it about her apparent support for negative interest-rate and QE that attracted the attention of Mark Carney? Of course in a world after the woeful failure of Forward Guidance and indeed the litany of forecasting errors he was probably grateful to find someone who still calls the Bank of England “credible”!

Comment

We have a few things to consider and let me start with the reaction function of foreign exchange markets. The real news was yesterday as a fan of negative interest-rates was appointed to the Bank of England but the UK Pound waited until Mark Carney repeated his views of only Thursday to fall!

Meanwhile there was this from Governor Carney.

Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new
trading arrangements with the EU. But it can influence how this hit to incomes is distributed between job losses and price rises.

His views on the EU leave vote are hardly news although some are trying to present them as such. You might think after all the forecasting errors and Forward Guidance failures he would be quiet about such things. But my main issue here is the sort of Phillips Curve way we are presented a choice between “job losses” and “price rises” Just as all credibility of such thinking has collapsed even for those with a very slow response function in fact one slow enough to be at the Serious Fraud Office. He is also contradicting himself as it was only a few months ago we were being told by him that wage growth was on the up. Although that February Inflation Forecast press conference did see signs that the normally supine press corps were becoming unsettled about a Governor previously described as a “rockstar central banker” and “George Clooney” look a like.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

He may not be that bothered as you see much of today’s speech was in my opinion part of his job application to replace Christine Lagarde at the IMF.

With many concerned that global trade is taking local jobs, protectionist sentiments are once again rising
across the advanced world. Excessive trade and current account imbalances are now politically as well as
economically unsustainable.

Number Crunching

The Bank of England is in a mess of its own making

Today is what is called Super Thursday at the Bank of England although if the brief history is any guide it rarely lives up to the moniker! Actually it is a bit like its Governor Mark Carney whose stewardship has been much more hype than substance.  Indeed only recently we saw that demonstrated by the Charlotte Hogg episode where someone was promoted to the Monetary Policy Committee ( MPC) who when quizzed by Parliament was ignorant of many of the details. In fact as the Deputy Governor for Markets she would have been in charge of the £445 billion QE portfolio a subject about which she knew so little the Treasury Select Committee suggested she spoke to the Debt Management Office ( so she could learn something…). Yet according to Bloomberg the official Bank of England view is from an alternative universe.

Her departure “came at a critical time and represented a material loss to the management of the bank,” the BOE’s Court of Directors said,

Indeed her sacking for breaking rules that she had set is apparently “entirely disproportionate”. The rules presumably were for the little people and proles not for the daughters of baroness’s and earls it would seem. In the same way that whistleblowing rules seem not to apply to Jes Staley of Barclays. By the way this is the banking sector which we are so often told is completely reformed.

Women Overboard

The Carney era has come with protestations of more diversity and at first it seemed like that as more women were appointed. But the more hype than substance theme has appeared in 2017 as they seem to be leaving to go elsewhere. The two women who were on the MPC have either left or are going. Ironically the planned replacement Charlotte Hogg lasted not much longer than a May Fly. Then on April 20th the Financial Times reported this.

Jenny Scott, the executive director for communications at the BoE, is leaving to “pursue new opportunities, including those in the third sector”, according to an internal memo sent to Bank staff on Wednesday.

This is so reminiscent of the Yes Prime Minister episode on equal opportunities where the woman concerned says this about the situation.

I find it  comic, but then it is ( the civil service) run by men after all…. most of the work here needs only about 2 O’Levels anyway.

It is also quite a change of tack from the Financial Times from its previous gushing reviews of what it called a “rock star” central banker.

The “Early Wire” Problem

One of Governor Carney’s reforms was that the MPC now votes the day before the announcement. So that at 12 pm today we will be told the results of yesterday’s vote. The danger is of it leaking and makes one wonder about this from the Financial Times.

Two MPC members thought to have voted for increase at latest meeting

That may or may not be right but before the event there are clear fears they may now especially at a time of warnings like this from the Royal Statistical Society.

One of our key requests in this regard is for the government to end the practice of pre-release access to official statistics, whereby ministers and their officials have access to official statistics before they are released to the public.

Forward Guidance

This has of course turned out to be a anything but as it quickly became something of an oxymoron. There were plenty of ch-ch-changes in it as reality proved regularly inconvenient but they were quickly dwarfed by promises of interest-rate rises suddenly metamorphosing into a Bank Rate cut last August. Down was indeed the new up.

Next there was the issue of the post EU leave vote forecasts which were completely wrong which was especially material when the Bank of England cut Bank Rate and added both an extra £60 billion of ordinary QE and £10 billion of Corporate Bond purchases in response to a slow down which never happened! It has responded with a PR campaign to say that its move averted a slow down which would have been a new experience for the UK economy as monetary policy moves have always been considered to fully impact some 18 months or so after the change. Even worse for the spinners at the Bank of England the ECB has offered the view that the lags are now in fact longer than in the past.

The economic outlook

The outlook for inflation has been a problem for the credibility of the Bank of England ever since it cut Bank Rate last August as it did so in spite of expectations of it going above target. It ignored the impact of a weaker Pound £ and ploughed ahead anyway and already we see that consumer inflation is above target and set to go higher. In terms of how much higher both we and the Bank of England have got lucky with the recent dip in oil prices and the stronger trajectory for the Pound £. That was symbolised for me yesterday as I passed a garage in Vauxhall selling a litre of both diesel and petrol for 115.2p. That one is always at the cheaper end of the spectrum but fuel prices at the pump have dipped.

If we move to the prospects for GDP then we are now in the phase which I thought was going to be the difficult bit which was when inflation impacted on real wages. Today’s output and trade data have been in line with that as they were weak. You can excuse the production data as it was affected by mild weather and consequent low electricity output which was 80% of the March fall but manufacturing and trade were both poor.

The overall trade deficit (goods and services) widened both in Quarter 1 2017 and in the month of March, primarily driven by an increase in imports of oil, chemicals, mechanical machinery and motor vehicles. The total trade deficit in Quarter 1 2017 widened by £5.7 billion to £10.5 billion………The monthly fall of 0.6% in manufacturing was broad-based across 8 of the 13 sub-sectors.

Comment

The Bank of England finds itself in a very awkward position for an activist central bank. The Governor has the obvious problem that he told us that the “lower bound” for Bank Rate was 0.5% and then cut it to 0.25%! Should we see a phase of sustained economic weakness then presumably he would vote to cut again ignoring the fact that at such levels the economic gains are in my opinion offset by the losses such as the rise in unsecured credit. Which brings me to my next point if we are going to have a crony culture at the Bank of England why do we need the other 8 MPC members? Any dissent is so rare and has never been policy changing under Mark Carney’s tenure. Indeed Kristin Forbes waited  until after announcing her departure to actually vote for an interest-rate rise confirming the theme of members getting hawkish on the way out. Perhaps the most extreme case of that was the uber dove David Miles who suddenly claimed he was on the edge of voting for  rate rise.

Today is likely to see at least one vote for a Bank Rate rise but does anybody reading this really feel there is any stomach on the MPC for one? The last sequence of votes for a rise faded and ended up in a cut. Also do they still know where the switch is?

 

 

 

The UK Public Finances are another source of embarrassment for Mark Carney

Today sees the latest data on the UK Public Finances which so far have meandered on in the same not entirely merry way as before the EU leave vote. This is in stark contrast to the modeling provided by HM Treasury.

In the ‘shock scenario’ presented in the short-term analysis, in 2017-18, real GDP would be 2.9% lower than baseline, but potential GDP would have declined by 2.1% compared to the baseline.

Believe it or not this was the more moderate scenario and as we have not entered that fiscal year it could of course happen but so far we have seen nothing like that.Of course we should have done as the UK economy was supposed to immediately shrink by up to 1%. The consequence was that the fiscal or budget deficit would rise by £24 billion in 2017/18 and the more extreme “severe shock” would see it rise by £39 billion.

There is a particularly worrying postscript to this in that it was personally signed off by former Bank of England Deputy Governor Professor Sir Charles Bean who of course made a right charlie of himself. Well he is now at the Office of Budget Responsibility producing more growth and borrowing forecasts. There is a particular irony in the lack of responsibility and indeed the rewards for failure on display here.

The Financial Times brings up forecasts of a dire future almost as quickly as it has to offer mea culpae for the previous ones being wrong.

The EU’s Brexit negotiators expect to spend until Christmas solely discussing Britain’s divorce from the bloc, denying London any trade talks until progress is made on a €60bn exit bill and the rights of expatriate citizens.

The Bank of England

The Governor of the Bank of England Mark Carney is of course familiar with the concept of providing “alternative facts” and he was on that road at this month’s Inflation Report.

First, the Chancellor’s Autumn Statement eased fiscal policy over the coming years. This explains about half of our forecast upgrade.

Actually there was an announced change but of course that relies on you believing the forecasts of George Osborne. For example the UK budget was originally supposed to be in surplus right now which of course faded not to the grey of Visage but remained solidly in red ink. So it was the sort of claimed change which probably ends up at the same destination. The flight boards may say a diversion Helsinki but somehow the flight lands at the original destination Copenhagen. At the time of typing this Andrew Tyrie of the Treasury Select Committee is really skewering the Bank of England Chief Economist Andy Haldane on this subject by pointing out that this stimulus is apparently much more stimulative than others of the same size and asking why?

Of course Governor Carney is on the road to changing the UK public finances for the worse in two respects. As we move forwards the inflation he is so keen on “looking through” will raise the cost of financing index-linked bonds. As these are linked to the Retail Price Index which is rising at an annual rate of 2.6% the bill is on its way. Also part of the “Sledgehammer” of policy action last August was the Term Funding Scheme which has raised the national debt which shows a clear lack of forethought. You need to make your way to Appendix 9 but there it is some £31.37 billion of additional debt so that the Bank of England can subsidise the banks yet again.

Today’s data

We open with the traditional January surplus.

Public sector net borrowing (excluding public sector banks) was in surplus by £9.4 billion in January 2017, a £0.3 billion larger surplus than in January 2016; this is the highest January surplus since 2000.

There was some good news in the receipts column.

Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).

Of course it should be the best on record as it is inflated by economic growth and of course inflation over time. However the rises in the tax-free Personal Allowance over the past 2 government’s will have dampened this somewhat.

Something familiar

This is the ongoing issue of ch-ch-changes to the methodology stirring up all the grit from the bottom of the pot so that the water goes from clear to murky.

In this month’s bulletin we have introduced a new methodology for the recording of Corporation Tax and Bank Corporation Tax Surcharge receipts.

It is hard not to groan a little although of course it is badged as an improvement.

Previously, we have used cash receipts for these taxes as a proxy for accrued revenue. An improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place.

It is in fact a type of seasonal adjustment.

The impact of introducing the new methodology is to distribute the tax revenue more evenly over individual months in the year.

Actually it also makes the amount in recent years higher. Do they not know how much was collected?

A deeper perspective

This is provided by the financial year so far.

Public sector net borrowing (excluding public sector banks) decreased by £13.6 billion to £49.3 billion in the current financial year-to-date (April 2016 to January 2017), compared with the same period in the previous financial year;

This is essentially because of a good performance on the revenue front.

In the current financial year-to-date, central government received £553.7 billion in income; including £416.8 billion in taxes. This was around 5% more than in the previous financial year-to-date.

Also contrary to the hints of a fiscal boost we received last autumn and still be trumpeted by the Bank of England this morning there has been some restraint in public expenditure.

Over the same period, central government spent £581.2 billion; around 2% more than in the previous financial year-to-date.

Care is needed here but this is quite close to the current official inflation measure ( CPI 1.8%), the same as what next month will be the new measure at the top of the release ( CPIH 2%), and below the number used for index-linking for that sector of the UK Gilt market ( RPI 2.6%). Of course much of the period here was  where inflation was lower but its rise may well tighten policy in real terms. This would be consistent with what we are hearing from the NHS and councils although the former always needs more money.

The National Debt

If he was still Chancellor of the Exchequer George Osborne would be shouting this from the rooftops.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,589.2 billion at the end of January 2017, equivalent to 80.5% of gross domestic product (GDP); an increase of £43.6 billion (or a decrease of 0.6 % points as a ratio of GDP) since January 2016.

He was so keen to be able to declare the latter part of that quote but sadly for him he was the past before it arrived. Poor George, although if we look at his fees for speeches maybe not so poor George. The more eagle-eyed amongst you will have spotted the “improvement” which helped.

Public sector net debt (excluding public sector banks) was £1,682.8 billion at the end of January 2017, equivalent to 85.3% of gross domestic product (GDP); an increase of £91.7 billion (or 1.9 % points as a ratio of GDP) since January 2016.

Actually the internationally comparable figure was 87.6% of GDP as of last March.

Comment

As ever much is going on. If we start with the Bank of England then it has not so much moved the goalposts as built its Ivory Tower on the wrong pitch. As the Ivory Tower is fixed in the ground then reality has to change so it has spent so much of this morning talking about a theoretical concept called U* unemployment which does some of the trick. They were discomfited trouble when Andrew Tyrie simply asked them when this had happened before? I did not expect Mark Carney to know as of course the UK did not exist before June 2013 but the blank embarrassed faces of the others were a sight to behold. Sadly nobody asked about why so many female members were leaving the Monetary Policy Committee this year?

The public finances continue to improve albeit more slowly than we would have hoped. There are dangers ahead from the cost of index-linked Gilts as inflation continues to rise and the impact of this inflation on the wider economy. But there are other issues as for example an area near to me in Battersea Park often becomes a trailer park in the search for more revenue, although sadly I understand that the benefit goes more to a private company ( Enable ) than the council itself.

 

 

 

 

 

The Forward Misguidance of Mark Carney and the Bank of England continues

Yesterday was a rather extraordinary day at the Bank of England even by its standards. I do not mean in terms of the policy announcements as they were not only unchanged but were always likely to be that way. This is of course because it boxed itself in with its pronouncements of economic doom last summer leading to its Bank Rate cut and extra QE (Quantitative Easing). There was actually a technical announcement on the QE front about another Operation Twist style move.

the Committee agreed to re-invest the £11.6 billion of cash flows associated with the redemption of the January 2017 gilt held by the Asset Purchase Facility

If you think about an economy which the Bank of England now thinks will have 2% economic growth in 2017 and inflation heading above target soon that is simply completely inappropriate and wrong. It is a consequence of its silly “Sledgehammer” rhetoric which Mark Carney plainly feels is too embarrassing to reverse now.

Economic growth forecasts

The Bank of England and Mark Carney seem to be getting worse and worse at this. From yesterday’s MPC (Monetary Policy Committee) Minutes.

The preliminary estimate of GDP growth for 2016 Q4 had been 0.6%, the same rate of growth as had been registered in the previous two quarters, and 0.2 percentage points higher than expected at the time of the November 2016 Inflation Report. This, together with improvements in business survey output and expectations indicators, had led Bank staff to raise their GDP growth nowcast for 2017 Q1 to 0.5%, also 0.2 percentage points higher than in November.

Such things matter when the Forward Guidance had led to policy changes as we saw in August. In fact the situation is ever more woeful than that. Even the Financial Times which of course has lauded Mark Carney as a “rockstar” central banker could not avoid pointing out this reality.

The Bank of England upgraded UK growth forecasts significantly for the second time in six months on Thursday in the latest indication the central bank’s once-dire outlook for the economy after June’s Brexit vote has been proven overly pessimistic.

The bank said it now predicts gross domestic product will grow 2 per cent this year, the same as last year and up from 1.4 per cent forecast in November. Shortly after the referendum, the BoE predicted the economy would expand just 0.8 per cent.

The simple fact is that the UK consumer and if you look into the detail our female consumers behaved like they have in the past and carried on regardless. It is for the Bank of England to explain why it ignored UK economic history. Perhaps the way it is now packed with people I have described as Carney’s cronies?

Was this predictable?

Yes it was as I pointed out back then. From August 3rd last year on the day of ignominy for the Bank of England.

I would vote for unchanged policy as I waited to see how we respond to the lower value of the UK Pound £ which on the old rule of thumb has provided a move equivalent to a 2%  Bank Rate cut.

I repeated this view on BBC Radio Four’s Moneybox on the 17th of September when I debated with ex Bank of England staffer Professor Tony Yates who said “they did pretty much the right thing”. However it was kind yesterday of Mark Carney to confirm that I was indeed right all along.

Third, financial conditions in the UK remain supportive, underpinned by low risk-free rates, the 18% fall in sterling since its November 2015 peak, and lower credit spreads.

Mark Carney tries to take the credit for this

Perhaps the worst part of yesterday’s Inflation Report was the bit where Mark Carney tried to take the credit for the performance of the UK economy.

In part this reflects Bank of England policy actions, which have also helped lower the impact of uncertainty on activity.

He omitted to point out his own doom laden pronouncements which would hardly have helped uncertainty and he had another go at that yesterday.

This stronger projection doesn’t mean the referendum is without consequence………More broadly, the level of GDP is still expected to be 1½% lower in two years’ time than projected in May, despite the substantial easing of monetary, macroprudential and fiscal policies.

If we return to Governor Carney’s claims we see that we had a “bazooka” from a lower pound compared to a “pea shooter” from his Bank Rate cut as I pointed out on Moneybox. Indeed the Governor got himself into something of a mess at the press conference as he tried to take some of the credit for consumer resilience (debt fuelled growth) and then denied that there was much debt fuelled growth! So let us leave him in his own land of confusion.

Ivory Tower alert

We got some of this too as the woeful Bank of England forecasting effort saw this addition.

Specifically, the MPC now judges that the rate of unemployment the economy can achieve while being consistent with sustainable rates of wage growth to be around 4½%, down from around 5% previously.

This was such a hot potato that the subject was handed over to Deputy Governor Ben Broadbent to explain. Ben was obviously uncomfortable as he began speaking behind his hand in the manner of Jose Mourinho. He then tried to tell us he had been right all along which of course begged the question of why there was a change? Anyway we then did get a brief burst of honesty.

Forecasting is a hazardous business

It is for Ben!

Oh and remember when their Forward Guidance was that 7% unemployment was a significant level? Whatever happened to that….

Inflation

Another problem is brewing here and this is in addition to the fact that it is going “higher and higher”. This from the Bank of England yesterday was simply wrong.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time.

As I have written many times on here that is too low as I expect it to rise above 3% due to the impact of the lower UK Pound £ and the higher price of crude oil. I recall Kristin Forbes of the Bank of England saying that she thought inflation would be pushed some 1.75% higher but now she seems to have done something of a U-Turn and decided it will be more like 0.75%. As the UK Pound £ has fallen further in the meantime that is quite a big change.

Comment

There is one aspect of Bank of England Forward Guidance which has in fact proved correct.

the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis.

I think we can say 0.25% is materially below 5%. But the rest of it has proven to be woeful. After all Mark Carney’s hints of a Bank Rate rise would fit an economy over 3 years into a growth phase and with inflation set to run above target. But of course all his hints and teases were followed by exactly the reverse or a Bank Rate cut.

As to the inflation forecast well this morning has brought the beginnings of a further critique of that as well. From the BBC.

Npower has announced one of the largest single price rises implemented by a “Big Six” supplier. The company will raise standard tariff electricity prices by 15% from 16 March, and gas prices by 4.8%. A typical dual fuel annual energy bill will rise by an average of 9.8%, or £109.

Also there is the media inspired great lettuce and broccoli crisis of 2017.

Some supermarkets are rationing the amount of iceberg lettuce and broccoli customers can buy – blaming poor growing conditions in southern Europe for a shortage in UK stores.

Tesco is limiting shoppers to three iceberg lettuces, as bad weather in Spain caused “availability issues”.

Morrisons has a limit of two icebergs to stop “bulk buying”, and is limiting broccoli to three heads per visit.

Asda said courgette stocks were still low after a UK shortage last month.

I guess we can expect higher prices here too as we mull whether the weather has ever affected food availability in the past! As a public service announcement there did not appear to be any shortage at Lidl at Clapham Junction yesterday. What will the Bank of England do about rising inflation? Well as you can see it takes a while to say “nothing”

At its February meeting, the MPC unanimously judged that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.

If you are trading the US non-farm payroll numbers today then good luck….

 

 

 

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.