Today brings UK credit growth especially unsecured credit growth and the Bank of England into focus so let me open with the market view on interest-rate prospects.
Interest rate swap markets have cut expectations of a quarter-point rate hike from the Bank of England by the end of 2019 to 52 percent on Wednesday, compared to a previous 64 percent expectation.
The latest leg down in market expectations of a rate hike comes after overnight political developments that has sown fresh uncertainty for the British economy in the near term. ( Reuters)
Personally I find that rather odd as I think a cut is about as likely as a rise. Indeed with slowing world economic growth in ordinary circumstances people would be looking for a cut. I can understand those who think that in a disorderly Brexit the Bank of England might be forced to raise interest-rates to defend the value of the UK Pound £. But the catch is that when the Pound fell after the EU Leave vote Governor Carney and his colleagues decided to cut rather than raise Bank Rate. So it would require a collapse in the Pound for the Bank of England to raise rates.
There is a curious situation about the gold that is stored by the Bank of England but belongs to Venezuela. Reuters explains.
It is a decision for the Bank of England whether to give Venezuelan President Nicolas Maduro access to gold reserves it holds, British junior foreign office minister Alan Duncan said on Monday.
Venezuelan opposition leader and self-declared president Juan Guaido has asked British authorities to stop Maduro gaining access to gold reserves held in the Bank of England, according to letters released by his party on Sunday.
As that is an official denial from Alan Duncan we immediately suspect the government has applied pressure on the Bank of England. But it is left in an awkward position and so far it has refused to return the gold to Venezuela which begs more than a few questions as it holds quite a lot of gold for foreign countries.
If we look into the situation the Bank of England holds some 165,377,000 troy ounces.
A troy ounce is a traditional unit of weight used for precious metals. It is different in weight to an ounce, with one troy ounce being equal to 1.0971428 ounces avoirdupois.
It has been falling recently but rose quite a bit in the latter part of 2016 and 2017. In terms of gold bars it is a bit over 413,000. Contrary to what some claim the UK still has some gold ( worth £9.41 billion in the 2017/18 accounts) as pert of its foreign exchange reserves.
Returning to the issue of Venezuela I see George Galloway has got rather excited on RT.
The bank’s decision to seize – a polite word for steal – more than a billion dollars’ worth of Venezuelan gold was reportedto have been ordered by the governor after a call from US National Security Advisor John Bolton and Secretary of State Mike Pompeo – not even the president himself.
Apart from that being hearsay they have not seized it as they already had it but they are currently refusing to return it. I have some sympathy at the moment as who should they return it too in a country which is in turmoil? A lot of other markets concerning Venezuela have seen changes as for example the market in bonds of the state oil company PDVSA has dried up.
So to my mind the current position of the Bank of England has a weakness ( fears you might not be able to get your gold back) but also a strength ( it will question who is reclaiming it). Also as to how much of the gold at the Bank of England is actually gold here is John Stewart with a different perspective.
People out there turnin’ music into gold
People out there turnin’ music into gold
People out there turnin’ music into gold
Money Supply and Credit
These are hot topics on two counts. Firstly slowing money supply growth proved to be a reliable indicator of weak economic growth in 2018 and secondly soaring unsecured credit growth showed vulnerabilities in the UK economic structure.
So we first observe a welcome move.
The total amount of money held by the UK private sector (broad money or M4ex) increased by £11.5 billion in December. Within this, money held by households increased £5.5 billion, significantly above the £3.2 billion average over the past six months. This increase was driven by deposits in interest-bearing instant access savings accounts. Money held by UK private non-financial corporations (PNFCs) increased £1.5 billion, in line with the recent average.
This means that the annual rate of growth has risen from 2.2% to 2.5%. This is still weak but a more hopeful sign emerges if we look at the latest three months because they show an annualised rate of growth of 4.3%.
If we switch to a lending side style analysis we see this.
Households borrowed £4.1 billion secured against property in December, slightly above the average of the previous six-months……The amount businesses’ borrowed from UK banks………. Borrowing from banks remained robust in December at £2.3 billion.
If we add in unsecured credit and the other components we see that lending growth rose to 3.7% from the recent nadir of 3.1% in September.
Here are the numbers.
The extra amount borrowed by consumers to buy goods and services fell to £0.7 billion in December . Within this, credit card borrowing was particularly weak at only £0.1 billion, compared to an average of £0.3 billion since July. The overall consumer credit monthly flow was slightly below the £0.9 billion monthly average since July, and significantly below the average between January 2016 and June 2018 of £1.5 billion.
We need to take care with phrases like “particularly weak” as credit card borrowing has been on something of a tear in the UK meaning that at £72.2 billion it is 7.1% higher than a year ago. Perhaps Deputy Governor Dave Ramsden wrote that but as he of course described 8.3% growth as “weak” not so long ago.
The annual growth rate of consumer credit has been slowing gradually since its peak of 10.9% in November 2016, falling further to 6.6% in December.
So we have a nuanced view here which is threefold. Firstly it is welcome to see a decline in the rate of growth. A catch though is that this rate of growth is on inflated levels and is still far higher than other numbers in the UK economy at around quadruple the rate of economic growth and double wage growth. Lastly the peak of November 2016 suggests it was puffed up by the “Sledgehammer QE” and Bank Rate cut of August 2016 a subject the Bank of England would rather not discuss.
There is a fair bit to consider here but let us start with a welcome improvement in the UK money supply trajectory. I realise this is against the rhetoric we hear from elsewhere but the numbers are what they are. At a time when the world outlook is weak we need to grab every silver lining. The situation is more complex with unsecured credit because whilst the annual rate of growth is slowing some of that is due to it being on a larger amount ( £215.6 billion). Also some of it is due to a slowing of car loans as we see that sector slow due to technical reasons such as the diesel debacle. According to the UK Finance & Leasing Association car finance had 0% growth in November as falls in new car finance were offset by higher used car finance. This is at a time where we continue to pivot towards a rental/lease model as opposed to an outright purchase one.
The percentage of private new car sales financed by FLA members through the POS was 91.2% in the twelve months to November.
Let me end with some good news and a compliment for Governor Mark Carney. It comes from a disappointingly downbeat comment from Katie Martin of the Financial Times.
There’s more trade in the renminbi in London than there is in the euro vs sterling, which is weird/interesting.
Actually that is good news and confirms a conversation I had a while back with one of the managers of the Chinese state body in the City. It is an area of strength for the UK economy and I believe the Bank of England has supported this. Not all areas of banking are bad just some.