What will the Bank of England be considering today?

Later on today the Bank of England will be considering and voting on something it has not done for more than a decade. Let me take you back to July 2007 when it told us this.

The Governor invited the Committee to vote on the proposition that Bank Rate should be increased by 25 basis points to 5.75%. Six members of the Committee (the Governor, John Gieve, Kate Barker, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition. Rachel Lomax, Charles Bean and David Blanchflower voted against, preferring to maintain Bank Rate at 5.5%.

The idea of interest-rates being at 5.5% let alone 5.75% seems from a universe “far,far away” doesn’t it? Also if the public pronouncements of the current Monetary Policy Committee or MPC are any guide there is likely to be a split vote this time around. It is not that MPC members have not individually voted for rises as for example Ian McCafferty has had two phases of it before the current one it is the lack of company they have received. Perhaps most telling in the recent era is that the current Governor Mark Carney has yet to cast a single vote for a Bank Rate rise in spite of 2 clear periods before now ( in 2014 and 2015/16) when he has clearly hinted at delivering one.

Some are completely convinced as this from Reuters suggests.

Britain’s National Institute of Economic and Social Research said it expects the Bank of England to start a sustained rate-tightening cycle on Thursday, which will lead to interest rates peaking at 2 percent in 2021.

Inflation

There is something of a myth that the Bank of England simply targets 2% per annum inflation when this days it is not that simple. There has been some meddling in its remit particularly by the previous Chancellor George Osborne such that it now considers it to be this.

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target,
and in a way that helps to sustain growth and employment.

The “and” is misleading as the two objectives can be contradictory. That was seen as recently as August 2016 when the Bank of England cut Bank Rate to 0.25% and undertook its Sledgehammer of QE. This was supposed to boost the economy but anticipation of it ( as it was well leaked) meant that the UK Pound fell further than otherwise raising imported inflation. So the current inflation issue where the official measure is at 3% is awkward to say the least because it is a consequence of past Bank of England action. A nudge higher to 3.1% would be even more awkward as Governor Carney would have to write a letter to the Chancellor explaining how he was going to reduce something he had helped push up!

Also current inflation is not really something the MPC can do much about now as it takes time for any policy move to have an impact and this usually takes between 18 months and two years to fully work. If we look ahead then the MPC itself thinks that domestically generated inflation is not a big problem or at least it did in August.

Wage Inflation

This deserves a heading of its own as it comes part of domestic inflation ( via labour costs) but is also a target variable itself. Back in August the Bank of England picked out wage inflation as something it expected to rise. However like all its other Forward Guidance on this issue it has been wrong so far as wages have progressed on a pretty similar trajectory and not as it suggested.

We have a relatively tight job market and we do think that wages are going to begin to firm. We’re seeing, and one doesn’t want to over-interpret, but certainly on a survey
basis and some very recent data, some elements of that firming.

Imported Inflation

If we look for the level of the Pound £ last August we see that it has not changed much against the US Dollar although care is needed as it fell after the Bank of England meeting as some felt it had hinted at an interest-rate rise then. One different factor is the price of crude oil as depending on its exact level when you read this it is a bit over nine US Dollars higher than then. So a little push higher in the inflationary chain although the effect of the 2016 fall in the Pound will begin to wash out in a few months.

So the two main issues are whether you think the price of oil can go much higher? Party time for the producers and the shale oil wildcatters if it can. Also what you think about the UK Pound’s prospects after its 2016 drop?

Employment

This is another of the target areas these days but whilst it has been a happy record for UK workers it has been a woeful one for the Bank of England in the era of Forward Guidance. We can argue now about how much importance it put on an unemployment rate of 7% back in 2013. But what is not in dispute is the fact that it was rescinded at express pace and the “threshold” has gone 6.5%,6%,5.5% and now 4.5%. With the unemployment rate now 4.3% with record employment and no sign of wage pressure the last number may soon be due a demotion as well giving the MPC a rather full recycling bin.

Growth

There are two ways of looking at this. The first is to say that the current expansion is getting rather mature. Or as the Office for National Statistics puts it.

Following growth of 0.4% in Quarter 3 2017, GDP has grown for 19 consecutive quarters.

So you could say that it is past time to ease the monetary stimulus although of course that would have people looking over your shoulder to August 2016! The other way of looking at it is more awkward as having cut Bank Rate when GDP growth was of the order of 0.6/7% a rise now would be doing so when it is 0.3/4%. Ooops!

Comment

If we look at this as the Bank of England is likely too then there are various issues for it. We see that it can do very little about the current inflationary episode and that its claims of seeing higher wage growth after so many mistakes may bring laughter even at what is often a supine media at the press conference ( after all they want to be able to get in an early question….). It will be doing so at a level of economic growth that has often made it cut not raise interest-rates. If we look at the unsecured credit growth issue that I analysed on Monday the problem is that it has been at the same growth rate for a while and the Bank of England lit the blue touch-paper for it in August 2016,

Thus if it does raise Bank Rate it is likely to involve a downbeat assessment of productivity and the supply side of the UK economy. This will then allow it to continue its post EU leave vote pessimism and attempt to dodge the obvious timing problem. The catch is that its theoretical efforts in this area have had about as much success as Chelsea’s defence last night.

As for my views the first bit is easy yes Bank Rate should be 0.5% as part of an effort to take it higher, the catch is in the timing as this inflationary episode is past us in monetary policy terms. But as we can see from the current level of the UK Pound ( US $1.33 and Euro 1.14) it can help going forwards. The market is settled it will happen but I expect some to vote against as intriguingly two inside members ( Cunliffe and Ramsden) have hinted they will and of course Silvana Tenreyro was reported as saying this by Reuters only last month.

New Bank of England rate-setter Silvana Tenreyro said she was not ready to vote to raise the Bank’s record low interest rates in November although she might do so in the coming months if inflation pressure builds in Britain’s labour market.

Could the “unreliable boyfriend” emerge again or will it be a case of one and done like in Canada under Governor Carney? ( correction as Andrew Baldwin points out in the comments rates were raised to 1%).

Oh and as a reminder take care from late this afternoon as that is when the MPC actually vote. The delay between this and the announcement which was introduced by Governor Carney is something that can only go wrong ( i.e leak) in my opinion.

 

 

 

 

 

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UK GDP growth poses a new problem for the “unreliable boyfriend”

Today brings us the latest economic growth or Gross Domestic Product data for the UK and of course the numbers will be pored over way more than they can stand. There are questions over the state of accuracy when all the data is in but at this first preliminary estimate it has only 42% of the total. Thus I support the move to take more time ( and collate more data) in the future.

Office for National Statistics (ONS) proposals to move to a publication schedule of two estimates of quarterly gross domestic product (GDP) using data from all three of the output, income and expenditure approaches around six weeks and 13 weeks after the end of the preceding quarter.

In terms of the main output measure of GDP this will mean that the first estimate will be a couple of weeks or so later but will have just under 60% of the full data set.

The other change I am much more dubious about as I feel this is going in the opposite direction of more timeliness but less accuracy.

ONS will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

If you think about it the two moves are contradictory as if we need more time for the quarterly data how can we produce accurate monthly numbers? I have pointed out before that the surveys for the services sector in the trade figures are quarterly ( which yes do pose a question for monthly trade figures) and will not provide much confidence for monthly GDP numbers. Even worse there will be rolling quarterly GDP figures leading to confusion for the unwary and for some to pick and choose between which number they look at.

What is GDP good for?

Many of the problems of GDP come from this simple point explained by Diane Coyle.

GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced and consumed in a country in a given period of time.

This means that work which does not have a price/cost is not included. So if you wished to boost it everyone could pay their neighbour to wash their car or do their housework but reality would be unchanged. Even worse the modern digital era and changes in the way people work have made matters more complex and difficult.

More and more people are self-employed or freelance through digital platforms. Their hours may be flexible, and work can overlap with other activities. In many cases they are using household assets, from computers and smartphones to their homes and cars, for paid work.

Another problem is the estimation of inflation as GDP is measured in monetary terms and you need an inflation measure or deflator to get a real number to run comparisons over time. Here I tend to disagree with Diane as I feel that there has been an effort to inflate GDP numbers via reducing measured inflation. For example the statistician Dr. Mark Courtney has estimated that replacing the Retail Price Index with the Consumer Price Index or CPI has boosted the stated GDP growth of the UK by around 0.5% per annum. Should the new “more comprehensive” CPIH replace CPI in the numbers then it would add a smidgen more.

So we have a push me pull me type of situation where I agree that the digital side of the services economy is probably under measured but where changes to the inflation infrastructure have led to it being over measured.

If you want to know how the services sector has grown over time then this sets the pattern.

Bringing that up to date the latest numbers assume that the services sector is now 79.3% and manufacturing is 10.04%. Personally I think that the former number is still too low.

The Trend

Thus has been for economic growth to slow in 2017 so far as in essence we have gone from an annual economic growth rate of at times ~3% to one of more like half that. There have been two main factors at play here. Firstly the impact of higher inflation coming from a lower UK Pound £ after the EU leave vote and secondly the fact that the boom had become mature. After all factors like house prices and retail sales were unlikely to keep rising at the rates we had seen.

Today’s numbers

They were good albeit of course we need to remember the reservations described above.

UK gross domestic product (GDP) was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2017, a similar rate of growth to the previous two quarters.

Also should this continue then the relative importance of manufacturing may rise as we look forwards.

Manufacturing returned to growth after a weak Quarter 2 2017, increasing by 1.0% in Quarter 3 2017.

As to the trend well there was this.

Following growth of 0.4% in Quarter 3 2017, GDP has grown for 19 consecutive quarters.

But it is also true that the annual rate of growth remained at 1.5% ( or in fact slipped from 1.7% if we recall the revisions). So we needed a better quarter to halt or slow the annual decline.

Maybe also we will seem some benefit individually.

GDP per head was estimated to have increased by 0.3% during Quarter 3 2017.

If we move to the detail then there were various factors at play. Let us start with manufacturing.

due to growth across a number of industries, including the manufacture of transport equipment, other manufacturing and repair and the manufacture of machinery and equipment.

It’s growth suggests good news for the trade figures although so far they have not shown it. Also we had growth from services driven by this.

The main contributor to growth was the business services and finance sector, which increased by 0.6%, contributing 0.19 percentage points to quarter-on-quarter GDP growth. Growth in this sector was broad-based, with employment activities being the largest contributor (Figure 3), recording growth of 3.5% after a fall of 2.4% in Quarter 2 2017 and contributing 0.04 percentage points to GDP growth.

There was also this.

The largest individual contributor to growth in services was computer programming activities, which grew by 1.9% and contributed 0.05 percentage points to GDP growth……

If we move to August for services we see this.

motion pictures, which increased by 7.1%, contributing 0.06 percentage points; this growth follows a large fall in the industry in July 2017 and further information on the films in August 2017 can be found on the British Film Institute (BFI) website

Any analogies for Dunkirk?

Comment

The theme of the UK economy having stable but below trend growth in 2017 continues as 0.4% compares with say 0.6% as a trend. Of course that assumes the central bankers have indeed ended recession and speaking of central bankers imagine yourself as an “unreliable boyfriend” right now having given Forward Guidance that there will be an interest-rate rise if the economy does better! In the past the Bank of England has tended to respond to GDP data although of course we have to look back a very long time to see any evidence around an interest-rate rise.

Meanwhile we see that services are bumbling along manufacturing is doing rather well but construction is in a recession. An odd mixture as we are supposed to be building so many houses…….

 

 

Can the “unreliable boyfriend” settle down in November?

On the face of it yesterday was an example of “the same old song” at the Bank of England in more than one respect. Firstly something that seemed to get ignored in the melee was that the vote was the same as the last time around which was to continue with the QE ( Quantitative Easing) programme and 7 votes to keep interest-rates unchanged with 2 for a 0.25% hike. The QE vote was apposite as it is currently ongoing with around £3.3 billion being reinvested earlier this week.

The next example of the “same old song” came with a somewhat familiar refrain in the official Minutes of the policy meeting.

All MPC members continued to judge that, if the economy were to follow a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.

This has the familiar promise but as usual had “if” and “could” as part of it. But then there was something new.

A majority of MPC members judged that, if the economy continued to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.

As they are currently refilling the QE programme and in the past have said that they would raise Bank Rate before changing the QE total this was “central bankingese” for an interest-rate rise. There are obvious issues here but let us park them for now and look for an explanation of why?

The economy is doing better than expected

The initial explanation trips over its own feet.

Since the August Report, the relatively limited news on activity points, if anything, to a slightly stronger picture than anticipated. GDP rose by 0.3% in the second quarter, as expected in the MPC’s August projections,

So we simultaneously did better and the same as expected?! Let us move onto something where this may actually be true.

The unemployment rate has continued to decline, to 4.3%, its lowest in over 40 years and a little lower than forecast in August. Survey indicators are consistent with continued strength in employment growth.

Also no matter how often the output gap theories of the Ivory Towers are proved wrong they are given another throw of the dice just in case.

Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity.

Problems with this view

If you take that as a case for a Bank Rate rise there are two immediate issues to my mind. Let us return to the “output gap”.

Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years.

Actually if you look at the employment situation in the UK exactly the reverse has been true as I pointed out in my “the boy who cried wolf” article on Monday. We have been told that unemployment rates of 7%, 6-6.5%, 5% and then 4.5% are significant as the Bank of England theorists attempt to run in quicksand. If we look at the flip side of this potential supply growth in terms of employment has surged as we have moved to record levels.

Also there is the issue of wage growth which of course is interrelated to the paragraph above. We are told this.

Underlying pay growth had shown some signs of recovery, albeit remaining modest.

They have also looked into the detail and concluded this.

Empirical estimates by Bank staff suggested that these may have depressed annual growth of average weekly earnings by around 0.7 percentage points ( New data from the ONS suggested that compositional effects related to factors including the skills, industry and occupational mix of the workforce had pushed down average pay growth in the year to Q2. )

Let me bring this up to date as Gertjan Vlieghe is giving  a speech as I type this and he has reinforced this theme.

Wage growth is not as weak as it was earlier in the year: over the past 5 months, annualised growth in private sector pay has averaged just over 3%. And some pay-related surveys also suggest a modest rise in wage pressure in recent months.

Let me give you a critique of that firstly as shown below.

Actually that is the overall rather than just the private-sector picture but if we look at that and use Vlieghe’s figures it looks to me that he has not include the latest numbers for July where there was a dip in bonus payments as I pointed out on Wednesday. So total annualised wage growth fell from 3.2% to 1.4% and it is odd that Gertjan has apparently missed this as you see he was given the data early.

As to the possible compositional effects let me explain with an example sent to me on twitter.

Janet & John are each paid 100. After good year pay goes to 110; so good they employ Timmy and pay him 80. Ave pay (now for 3) unch at 100 ( @NelderMead ).

Nice to see I am not the only person who was taught to read with the Janet and John books! But the catch is that we keep being told this and then like a mirage it fades away as a different reality emerges. The Bank of England has been a serial optimist on the wages front and has been left red-faced time and time again.

Comment

One thing I welcome about the news flow over the past 24 hours from the Bank of England is the way that it has pushed the UK Pound £ higher. It has gone above 1.13 versus the Euro and 150 to the Japanese Yen and most importantly above US $1.35 which influences what we pay for most commodities. This response to a possible tightening embarrasses those who claimed the Bank of England easing did not weaken the Pound £ last summer. Not the best timing for those saying parity with the Euro was just around the corner either.

Moving onto the economics then there is something more than a little awkward in 9 supposedly independent people suddenly having the same thoughts. It is almost as if they are Carney’s cronies. It is hard not to sing along with Luther Vandross on their behalf.

I told my girl bye-bye
But I really didn’t mean it
Said, ?I met somebody new so fine?
But I really didn’t mean it

If you read the final part of the Gertjan Vlieghe speech there are grounds for him to change his mind.

If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.

After all he told us this only in April.

I will argue that there is an important distinction to be drawn between good monetary policy and making accurate forecasts

Remember when Ben Broadbent told us he would pick and choose amongst the data ( just after being wrong yet again).

Also it is hard to forget these previous episodes.

Mark Carney Feb 2016 “the MPC judges that it is more likely than not that Bank Rate will need to rise over our forecast period”

He of course later cut Bank Rate and before that there was this.

Mark Carney June 2014 An interest-rate rise ” could happen sooner than markets currently expect. ”

So let us welcome a stronger Pound £ as we note that Forward Guidance has been anything but. Let me finish with some Friday music from Prince which has been removed from the Bank of England play list.

This is what it sounds like
When doves cry

The Bank of England gets ready to cry wolf again

This morning has seen a clarion call from the Bank of England using its house journal the Financial Times. Its economics editor Chris Giles has reported this.

The Bank of England will this week step up its warnings that households, businesses and investors are underestimating how soon interest rates will rise.

Okay let us park for the moment the feeling of “deja vu all over again” and look for the explanation.

 

A strong body of opinion in the central bank, including the governor, believes that the economy is more vulnerable to inflation, so even a small improvement in its forecast for growth would require higher borrowing costs to stave off rising prices.

The last set of Monetary Policy Committee Minutes are mentioned and let me give a longer quote from them than used by the Financial Times.

some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target. Specifically, if the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.

This was all really rather mealy-mouthed and was so unconvincing that the 5 year Gilt yield which opened that day at 0.62% ( if we look back at the behaviour of the Pound £ back then some seemed to actually believe the Bank of England might act that day) fell sharply on the day. Other events have intervened ( North Korea) but it is now 0.45% which does not have much scope for Bank Rate rises to say the least.

We are also directed by the Financial Times to this in the August Quarterly Inflation Report.

 

Mark Carney, governor, backed this message up in the inflation report press conference saying that the BoE’s assumption at the time of “more than one interest rate hike over the course of three years . . . would be insufficient” to control inflation. Ben Broadbent, his deputy, added: “The important point is that one should not think that the economy, at the moment, can grow at the sort of rates we used to enjoy, certainly before the crisis before running into inflationary pressure”.

As you can see from the Gilt yield changes I pointed out above these two gentlemen could have saved themselves the embarrassment of everybody yawning and ignoring them.

Why might this be?

One problem is the Bank of England’s poor forecasting record combined with its problems with economics highlighted by this from my update on February 3rd.

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.

Remember when Governor Carney suggested that an unemployment rate of 7% was significant? We can argue now about how much significance but by signalling it one might reasonably expect action especially as it was not long before we were given more forward guidance about the unemployment rate.

an estimate of its medium-term equilibrium rate of 6%–6½%.

Of course it is now 4.4% and the output gap theories of the Bank of England have collapsed like Mordor’s Tower of Doom. Although the Ivory Tower thinkers that proliferate in Threadneedle Street continue to believe it is just around the corner.

Also there seems to be a problem with mathematics at the Bank of England as this from the FT highlights.

 

Bank officials say these views have not changed and the argument for rate rises to tame price rises will have strengthened since the last meeting following sterling’s 2 per cent drop, which will further increase the cost of imports and edge inflation higher in the months ahead.

Okay so a 2% drop is important but apparently this from February 3rd was not.

the 18% fall in sterling since its November 2015 peak,

Of course they actually cut interest-rates and added to QE by £70 billion when the UK Pound £ was very weak. This hyping a 2% move rips over its own feet. There is also the problem that the most important exchange rate for inflation purposes is against the US Dollar as so many commodities are priced in it and it is as I type this where it was before the last meeting.

Forward Guidance

The next problem is that Forward Guidance has been a catalogue of misguidance in this area. There was this from Chief Economist Andy Haldane on the 20th of June this year.

I considered the case for a rate rise at the MPC’s June meeting

This provoked a shock as it would have been a road to Damascus turn around for the architect of the “Sledgehammer” monetary easing of August 2016. Yet he has yet to vote for this and whilst he pointed towards later in the year what has happened to change his mind? Nothing really. The problem with dithering and delay is the lags in monetary policy as raising interest-rates now because you expect higher inflation in November is none to bright.

If we look back there was this from Governor Mark Carney back on the 12th of June 2014 in his Mansion House speech.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

We are still waiting Mark! Indeed “sooner than” has gone into my financial lexicon for these times alongside “temporary”. As he thought the economy back then was doing this it would be odd to act now rather than then.

with the economy expanding at an annualised rate of 4% and jobs growing at a record pace.

Oh and tucked away in that Mansion House speech was a critique of the policy easing of August 2016.

The economy is still over-levered. The housing market is showing the potential to overheat.

Quantitative Easing

If you wish to start tightening policy then as I suggested several years ago in City-AM it would be best to stop this.

As set out in the MPC’s statement of 3 August 2017, the MPC has agreed to make £10.1bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturities on 25 August and 7 September 2017 of gilts owned by the Asset Purchase Facility (APF).

Some £1.125 billion will be reinvested today in some short-dated UK Gilts.

Comment

Mark Carney faces quite a list of problems right now. His policy of Forward Guidance has in fact been misguidance and in spite of the supposed reforms its efforts at economic forecasting remain woeful. It is hard not to have a wry smile at this from the Guardian.

The Bank of England enforced a 1% rise on striking staff yet its fantasy forecasts claim a 3% rise for the UK as a whole is just around the corner. Really? How?

Actually if the hints of a change in the public-sector pay cap are true then we may see a modest rise in wages but that does nothing for the years of over optimism based you guessed it on the “output gap”. The deeper question is dodged that via underemployment and self-employment the situation is weaker than the official figures suggest and imply.

Perhaps we will be told the truth in a decade like these words on the BBC today from former Bank of England Governor Mervyn King.

My advice was very clear – we should not reveal publicly the fact we were going to lend to Northern Rock.

Although an ex-colleague of mine still does not seem keen.

The FSA’s former head, Sir Hector Sants, said it would be “inappropriate” for him to comment.

A Break

I plan to take at least a couple of days off as I will be attending Chelsea & Westminster Hospital tomorrow for some keyhole surgery on my knee. It has been a long story as I first ruptured my ACL well over 20 years ago but earlier this year I had another injury and decided this time that (hopefully) improvements in surgery and technology outweighed the risks of a reconstruction. Fingers crossed.

 

 

 

The problems of the boy who keeps crying wolf

Yesterday saw the policy announcement of the Bank of England with quite a few familiar traits on display. However we did see something rather familiar in the press conference from its Governor Mark Carney.

The Committee judges that, given the assumptions underlying its projections, including the closure of drawdown period of the TFS and the recent prudential decisions of the FPC and PRA, some tightening of monetary policy would be required in order to achieve a sustainable
return of inflation to target.

Yes he is giving us Forward Guidance about an interest-rate rise again. In fact there was more of this later.

Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying those projections.

Yep not only is he promising an interest-rate rise but he is suggesting that there will be several of them. Actually that is more hype than substance because you see even if you look out to the ten-year Gilt yield you only get to 1.16% and the five-year is only 0.54% so exceeding that is really rather easy. Also as I have pointed out before Governor Carney covers all the bases by contradicting himself in the same speech.

Any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent

So more suddenly becomes less or something like that.

Just like deja vu all over again

If we follow the advice of Kylie and step back in time to the Mansion House speech of 2014 we heard this from Governor Carney.

This has implications for the timing, pace and degree of Bank Rate increases.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

It could happen sooner than markets currently expect.

The print on the screen does not convey how this was received as such statements are taken as being from a coded language especially if you add in this bit.

Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner.

Markets heard that growth had been better and that the Bank of England was planning a Bank Rate rise in the near future followed by a series of them. Tucked away was something which has become ever more familiar.

 we expect that eventual increases in Bank Rate will be gradual and limited

Although to be fair this bit was kind of right.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter

Indeed the first Bank Rate increase was so unimportant it never took place.

Ben Broadbent

he has reinforced the new Forward Guidance this morning. Here is the Financial Times view of what he said on BBC Radio 5 live.

“There may be some possibility for interest rates to go up a little,” said Mr Broadbent.

It sounds as though Deputy Governor Broadbent is hardly convinced. This is in spite of the fact he repeated a line from the Governor that is so extraordinary the press corps should be ashamed they did not challenge it.

adding the economy was now better placed to withstand its first interest rate rise since the financial crisis…….Speaking to BBC radio, Mr Broadbent said the UK was able to handle a rate rise “a little bit” better as the economy is still growing, unemployment is at a more than 40-year low, and wages are forecast to rise.

Sadly for Ben he is acting like the absent-minded professor he so resembles. After all on that score he should have raised interest-rates last summer when growth was a fair bit higher than now.Sadly for Ben he voted to cut them! In addition to this there is a much more fundamental point which is if we are in better shape for rate rises why do we have one which is below the 0.5% that was supposed to be an emergency rate and of course was called the “lower bound” by Governor Carney?

Forecasting failures

These are in addition to the Forward Guidance debacle but if we look at the labour market we see a major cause. Although he tried to cover it in a form of Brexit wrap there was something very familiar yesterday from Governor Carney. From the Guardian.

 

We are picking up across the country that there is an element of Brexit uncertainty that is affecting wage bargaining.
Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.

Actually the Bank of England has been over optimistic on wages time and time again including before more than a few really believed there would be a Brexit vote. This is linked to its forecasting failures on the quantity labour market numbers. Remember phase one of Forward Guidance where an unemployment rate of 7% was considered significant? That lasted about six months as the rate in a welcome move quickly dropped below it. This meant that the Ivory Tower theorists at the Bank of England immediately plugged this into their creaking antiquated models and decided that wages would rise in response. They didn’t and history since has involved the equivalent of any of us pressing repeat on our MP3 players or I-pods. As we get according to the Four Tops.

It’s the same old song
But with a different meaning

Number Crunching

This was reported across the media with what would have been described in the Yes Minister stories and TV series as the “utmost seriousness”. From the BBC.

It edged this year’s growth forecast down to 1.7% from its previous forecast of 1.9% made in May. It also cut its forecast for 2018 from 1.7% to 1.6%.

Now does anybody actually believe that the Bank of England can forecast GDP growth to 0.1%? For a start GDP in truth cannot be measured to that form of accuracy but an organisation which as I explained earlier has continuously got both wages and unemployment wrong should be near the bottom of the list as something we should rely on.

Comment

There is something else to consider about Governor Carney. I have suggested in the past that in the end Bank of England Governors have a sort of fall back position which involves a lower level for the UK Pound £. What happened after his announcements yesterday?

Sterling is now trading at just €1.106, down from €1.20 this morning, as traders respond to the Bank of England’s downgraded forecasts for growth and wages…..The pound has also dropped further against the US dollar to $1.3127, more than a cent below this morning’s eight-month high.

They got a bit excited with the Euro rate which of course had been just below 1.12 and not 1.20 but the principle of a Bank of England talking down the Pound has yet another tick in any measurement column. Somewhere Baron King of Lothbury would no doubt have been heard to chuckle. There is a particular irony in this with Deputy Governor Broadbent telling Radio 5 listeners this earlier.

BoE Broadbent: Faster Inflation Fuelled By Pound Weakness ( h/t @LiveSquawk )

Oh and I did say this was on permanent repeat.

BoE Broadbent: Expects UK Wage Growth To Pick Up In Coming Years ( h/t @LiveSquawk )

 

Oh and as someone pointed out in yesterdays comments there has been yet another Forward Guidance failure. If you look back to the first quote there is a mention of the TFS which regular readers will recognise as the Term Funding Scheme. Here are the relevant excerpts from the letter from Governor Carney to Chancellor Hammond.

I noted when the TFS was announced that total drawings would be determined by actual usage of the scheme, and could reach £100bn………. Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £15bn to £560bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

Who could have possibly expected that the banks would want more of a subsidy?! Oh and the disinformation goes on as apparently they need more of it because of a “stronger economy”.

Also this seems to be something of a boys club again as my title suggests. We have had something of what Yes Minister might call a “woman overboard” problem at the Bank of England.

 

 

 

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

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