Falling house prices in Germany add to the pressure on the ECB

Last week brought some news which caught my eye. On Thursday Bloomberg told us this.

Germany’s housing boom is over as prices for residential properties dropped for the first time in over a decade.

For newer readers the significance of this is that central banking policy has been driven in the credit crunch era by house prices. Or more specifically they want house prices higher so they can claim wealth effects for them. In the Euro area they are aided bu the fact that the official inflation measure or HICP ignores owner-occupied housing entirely. So in theory any house price rise is officially pure gravy, as it is a real increase or wealth effect. Of course, in the real word things are different because first-time buyers face inflation for example. But the credit crunch has taught us that central banks are not very good at telling the difference between theory and inflation. Otherwise we would not be where we are.

What were the numbers?

Bloomberg told us this.

A measure of home valuations fell in December by 0.8% from the same month a year ago, according to data released by the mortgage technology provider Europace AG on Thursday. That’s the first decline in the company’s EPX index for the month since 2009.

Their chart shows that post credit crunch house price growth was of the order of 5% per annum. Then the advent of negative interest-rates and mass QE saw it rise to more like 10% and 2021 saw it push towards 15%.

What is causing this?

The drop in housing prices highlights how much the situation in the German real estate market has changed since the European Central Bank started last year to reverse a decade of low and even negative interest rates. The move has doubled or even tripled the cost of mortgages, pricing many consumers out of the once red-hot market for homes. ( Bloomberg)

That is interesting because as the ECB only raised interest-rates in July then we have apparently a very fast reaction function. What that fails to take account of is the fact that mortgage rates were already rising due to what was happening in the rest of the world influencing German bond yields and hence mortgage rates. The ECB has a composite mortgage rate measure which was 1.31% in December 2021 but by July 2022 it has already risen to 2.82% so more than double. So as Nelly reminded us.

It’s gettin’ hot in here (So hot)

So in essence we learn that there are quite a few fixed-rate mortgages in Germany and that they were impacting well before the ECB moved variable ones.

We can bring that more up to date because in the latest figures ( November) we see that the composite mortgage rate was 3.62%. So the pressure continued. Oh and there is something one might not expect which is that Germany was a fair bit above the Euro area average of 2.98%. whilst having one of the lower bond yields. I rather suspect this is telling us that it has more fixed-rate mortgages than Italy at 3.4%. As we stand those borrowing for a mortgage in Italy have been able to do so more cheaply than their government!

What happens next?

We get a fair clue from the rhetoric of the ECB itself.


That was from an hour ago as the ECB continues its open mouth operations. Bloomberg has summarised what the market thinks about this.

The deposit rate will be raised to a peak of 3.25% — from its current level of 2% in three steps. The survey shows two half-point hikes at the February and March meetings, followed by a 25 basis-point increase in May or June.

ECB policymaker Isabel Schnabel spoke on the 10th and is relevant on several counts. First she is a good weather vane for ECB opinion and secondly she is German. She starts with some outright hype.

Over the past year, we have moved forcefully to contain inflation by first stopping net asset purchases and then by raising our key policy rates by a cumulative two and a half percentage points.

So forcefully in fact that the Deposit Rate is 2% whilst inflation has been over 10 %. But the crucial issue is here.

We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.

This is another confirmation ( steady pace) that they intend to raise by 0.5% at the next two meetings. She takes an unusual route to this but as central bankers have gone “green” it shows that she really means it.

Therefore, the green transition would not thrive in a high inflation environment. Price stability is a precondition for the sustainable transformation of our economy.

Tucked away there is I think a direct hint for mortgage rates.

To resolve today’s inflation problem, financing conditions will need to become restrictive. Tighter financing conditions will slow growth in aggregate demand,

We can take that forwards because one of the lessons of the credit crunch was that the ECB could get some sort of control over shorter-term bond yields. Now it took a lot of bond buying or QE but it forced German ones in particular into especially negative territory. So we see that has continued on the rise with the German two-year yield at 2.6%. So it will presumably follow the planned  0.5% rises at the next couple of meetings with a clear implication for mortgage rates.


Actually for once the official series was ahead of the game.

WIESBADEN – The prices of residential property (house price index) in Germany rose an average 4.9% in the third quarter of 2022 on the same quarter a year earlier…… The Federal Statistical Office (Destatis) also reports that the prices of dwellings and of single-family and two-family houses were down by an average 0.4% compared with the previous quarter.

So we see that the price signal is now clear as in lower. As for prospects there is the issue of the supply of mortgage finance as well. According to Bloomberg that is pretty clear as well.

The amount of new loans for house purchases in Germany dropped 30% in the four months following the decision last July to raise interest rates for the first time since 2011, according to ECB data.

Thus the overall situation looks very bearish for house prices in Germany as we start 2023. Both mortgage finance supply and price is applying a squeeze and the ECB plans to increase both. But whilst I welcome lower house prices as first-time buyers deserve some relief. I expect that central bankers will start to get itchy short-collars as soon as we get a series of reports of house price falls. After all higher house prices are one of the few concrete things they can claim as a response to their policies.

Thus by the summer I am expecting the ECB to be mulling the words of Tears for Fears.

ChangeYou can changeChangeYou can change




Bank of England sees credit card borrowing surge as mortgage approvals fall

Today the focus switches to the Bank of England and in technical terms it will be starting 2023 in good cheer. That is because its financial stability or “Not QE” bond purchases have mostly been unwound and it looks set to make a profit of around £5 billion on them. So it will be able to provide a boost to the UK Treasury when it hands over the cash. But whilst one part of central banking went well the New Year has provided examples of areas where things have gone far from well.

Food inflation hit a record annual rate in December as cash-strapped households prepared for Christmas, according to a retail sector report.

The latest British Retail Consortium-NielsenIQ shop price index showed typical food grocery costs up 13.3% last month compared with December 2021.

The rate had stood at 12.4% in November. ( Sky News )

Even central bankers these days struggle to dismiss this as an example of a non-core item. The media mostly bypassed another part of the same report though.

Non-food price rises eased as some retailers used discounting to shed excess stock built up during the disruptions to supply chains, meaning some customers were able to bag bargain gifts. The combined impact was that price increases overall plateaued, with the reduction in non-food inflation offsetting the higher food prices. ( British Retail Consortium)

So there was a slight dip in overall shop inflation from 7.4% to 7.3% although that of course is way over the inflation target and whilst heading in the right direction still signals a major issue.

The improved inflation news was presumably a response to this highlighted by the S&P Purchasing Manager Index for manufacturing yesterday.

“The UK manufacturing downturn took a further turn for
the worse at the end of the year. Output contracted at one
of the quickest rates during the past 14 years, as new order
inflows weakened and supply chain issues continued to
bite. The decline in new business was worryingly steep,
as weak domestic demand was accompanied by a further
marked drop in new orders from overseas.”

So not so hot and the Financial Times has weighed in too.

But Britain’s downturn looks set to be both deeper and more prolonged. Forecasts compiled by Consensus Economics show UK GDP shrinking by 1 per cent in 2023, compared with a contraction of just 0.1 per cent for the eurozone as a whole and growth of 0.25 per cent in the US.

Although the logic in the Financial Times article is rather flawed.

“The 2023 recession will feel much worse than the economic impact of the pandemic,” said John Philpott, an independent labour market economist. Others described the outlook for consumers — especially those on low incomes or mortgage deals that were set to expire — as “tough”, “bleak”, “grim”, “miserable” and “terrible”. “The combination of falling real wages, tight financial conditions and a housing market correction are as bad as it gets,” said Kallum Pickering, senior economist at Berenberg bank.

Only yesterday we noted that real wages are falling faster in the Euro area than the UK. The FT is hot on the issue of mortgages which are an issue although a lagged one these days, But mostly it continues to grind its Brexit axe although to to be fair I agree 100% with this bit.

A significant minority said the UK was suffering from ministers’ outright incompetence.

Although I think they should also tell us who it was who thought that ministers were competent!

Consumer Credit

We can stay with the cost of living crisis as this part of the Bank of England money and credit release from this morning rather leaps off the page.

Individuals borrowed an additional £1.5 billion in consumer credit in November, on net, following £0.7 billion of borrowing in October (Chart 2). This was higher than the previous 6-month average of £1.1 billion.

That feels like one way of financing the cost of living crisis and more detail suggests credit cards took the main strain.

 The additional consumer credit borrowing in November was split between £1.2 billion on credit cards, which increased from £0.4 billion in October, and £0.3 billion through other forms of consumer credit (such as car dealership finance and personal loans).

This all happened in spite of the fact that much borrowing was getting more expensive.

The effective interest rate on interest-charging overdrafts in November increased by 20 basis points, to 20.93%. The effective rate on new personal loans to individuals increased by 64 basis points to 7.87% in November, the highest level since December 2017 (7.96%).

Although that did seem to bypass credit cards explaining perhaps the shift towards it.

Conversely, the effective rate on interest bearing credit cards dropped slightly to 19.24% in November, from 19.31% in October.

Mortgage Approvals

There was a clear impact here from what we might call the Liz Truss Experiment.

Approvals for house purchases, an indicator of future borrowing, decreased to 46,100 in November, from 57,900 in October, the lowest level since June 2020 (40,500). Approvals for remortgaging (which only capture remortgaging with a different lender) fell to 32,500 in November from 51,300 in October, and were below the previous 6-month average of 48,100.

There is a direct link with this bit.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 26 basis points to 3.35% in November. The rate on the outstanding stock of mortgages increased by 9 basis points, to 2.38%.

I would not get too hung up on the rather odd “effective rate”. I have been talking to them about this and they do realise that mortgage rates went to 6% ( in this instance they have the 2 year fix with 25% equity as 5.97%). They are attempting to cover the overall situation although presentationally it is misleading as best of luck getting a 3.35% mortgage rate!

Although so far the actual mortgage lending figures have not been affected we can expect them to be along soon enough.

Net borrowing of mortgage debt by individuals increased from £3.6 billion to £4.4 billion in November

Partly the effect was technical as it seems people reduced their payments where they could.

Gross lending decreased from £27.7 billion in October to £25.7 billion in November, while gross repayments dropped from £25.8 billion to £21.6 billion

We know that this is a priority area for the Bank of England and they will be watching it closely.


We can start with yesterday’s theme which is that the Bank of England has set policies which benefited asset owners ( lower interest-rates and QE bond buying) and punished workers and consumers. First by higher house prices and in 2022 as inflation impacted real wages.

Now we have a swerve as whilst we expect some relief from lower house prices as we move further into 2023 new home buyers are seeing this.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 26 basis points to 3.35% in November

Meanwhile back in the real world those taking out a mortgage were paying more like 6% which will be a drain on finances. Unless you are well off enough to not need a mortgage via perhaps the Bank of Mum and Dad which means that the wealthy are winning yet again.

Finally we may be able to discern something from the money supply data that was so distorted by the events of late last September.

The net flow of sterling money (known as M4ex) decreased to -£26.6 billion in November, from -£19.0 billion in October

This was a continuation of the reset after September but the numbers for both 3 month and annual broad money growth are now both approximately 4%. With inflation in double-digits quite a brake is being applied.

Also savers may be approaching the Charlie Bean Zone at least in nominal terms.

The effective interest rate paid on individuals’ new time deposits with banks and building societies was little changed, at 3.27% in November. The effective rate on the outstanding stock of time deposits increased by 29 basis points to 1.36% in November, the largest monthly increase since December 2021 when Bank Rate increases began.




Italy faces a tough 2023 with real wages falling by 8% and soaring energy prices.

Today is a bank holiday in Italy and in some ways ironically that directs straight to what has become its most famous bank. Yes the world’s oldest bank Monte dei Paschi.

This year, the Italian Treasury installed a new chief executive and attempted to revive it through yet another rights issue, its seventh in 14 years. The goal is to restructure the bank with a view to finally taking it private again. A first attempt last year was scuppered after Milan-based UniCredit and the Italian treasury failed to agree the terms of the takeover.

That is a summary of what ha led to here from the Financial Times and I note that they do also give us a strong hint as to how this has happened.

The foundation that once controlled the bank had close ties to Italy’s leftwing parties, with its board members appointed by local politicians.

That in Italy was especially dangerous because the banks were bit buyers of Italian government dent so there was a clear danger of you scratch my back and I will scratch yours. That has weakened in more recent times because the ECB has bought so many Italian government bonds. For instance its original QE buying programme has 446 billion Euros of them and the pandemic version or PEPP has 287 billion Euros of them. So Italy does not really need the banks to buy any more or rather it has switched to only one bank.

Finally a capital raise went through although as you can see below some of the methods were somewhat dubious.

Finally, a workaround was reached. The group of banks arranging the deal, together with Milan-based asset manager Algebris, agreed to underwrite the full private investors’ share in exchange for an extremely lucrative €125mn fee.

The Italian state exited its 20 billion Euros of losses by putting in an extra 1.6 billion. Anyway let us leave that there as we get the idea.

Economic Growth

As we have already had an example of bad Italy from our long-running Good Italy: Bad Italy let me now switch to an example of the good bit.

In the third quarter of 2022 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.5% to the previous quarter and by 2.6% in comparison with the third quarter of 2021.

Italy has seen some economic growth and by the standards of the credit crunch era some fast growth. The statistics office suggested this on Wednesday.

Italian GDP is expected to increase in 2022 (+3.9%) and then slowdown in 2023 (+0.4%),

So a good 2022 based on this.

Gross fixed capital formation will be the main driver of growth this year (+10.0%) and albeit to a lesser extent the next, (+2.0%).

At this point we have something of a dream scenario with economic growth being driven by investment. That fades somewhat when we note that trade will be a 1.1% drag on GDP this year. But Italy contrary to stereotype starts from a surplus trade position and the surge in energy prices will be the main change in 2022.

The one issue with all of this is how they get the inflation measure or GDP Deflator to only rise by 3.6%.


This area by contrast is rather grim.

In November 2022, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.6% on monthly basis and by 12.5% on annual basis (from +12.6% in the previous month).

As you can see inflation is raging although if you can avoid food and energy it is not quite so bad.

Therefore, core inflation (excluding energy and unprocessed food) was +5.7% (up from +5.3% in the previous month) and inflation excluding energy was +6.1% (up from +5.9% in October).

That is from a slightly different inflation measure but gives us an overall picture.

Real Wages

The going gets tougher when we note that wage growth is a lot below inflation. Regular readers may recall the Central Bank of Ireland wage tracker I looked at on the 

For individual euro area countries, October wage growth was highest in Germany (7.1%), followed by France (5.0%), Ireland (4.7%), Italy (4.2%), Netherlands (4.0%) and Spain (3.5%).

I do not have a detailed breakdown but do know that the overall Euro area average fell from 5.2% in October to 4.8% last month so Italy probably fell from the previous 4.2%. Even assuming it did not we see an around 8% gap with inflation which is one of the highest real wage falls we have looked at. Since the collapse of the Greek economy anyway.

This is a particular issue for Italy because real wage growth has been poor anyway. The International Labor Organisation recently calculated that real wages in Italy were only 88% of what they were pre credit crunch and I am afraid that there is more to come.

Also speaking of real wages here is a case of the biter bit.

ECB staff in pay dispute to hold talks about potential strike


Italy has moved from the icy cold world of negative interest-rates ( -0.5%) to a gentle warming at 1.5% with a rise to 2% expected next week from the European Central Bank or ECB. Putting it another way the ECB measure of mortgage interest-rates has risen from 1.43% in October last year to 3.11% this time around. For businesses its measure of interest-rate costs has risen from 1.29% to 2.64% over the same time scale.

So the interest-rate noose has tightened somewhat and we also note that bond yields have done the same. The thirty-year yield has doubled over the past year to 3.5% meaning that as we head forwards debt costs will rise, although more recently in line with other bond markets things have improved as it reached 4.6%.

Italy also has index-linked and floating rate debt both of which will have got more expensive this year.

floating-rate securities from 11.94% to 11.56% and index-linked securities from 11.14% to 11.95% ( Italy Treasury)


It is nice for once to be able to look at some growth in the Italian economy. The problem is that as I look at this quarter and the prospects for 2023 we have real wage growth of around -8%. mortgage costs rising and in addition to the price rationing of power for industry the prospect of actual blackouts. Italy relied on gas from Russia and used France and its nuclear capacity as another boost via energy imports. We know the issue with Russia and on Monday we noted the problems with France’s nuclear output with it now being an importer rather than an exporter of electricity.

Italy has plans going forwards but is short of capacity right now.

Spain, for example, which consumes 30 billion cubic meters, has a regasification capacity of 60 billion cubic meters, Descalzi said. Italy, meanwhile has just 17 billion cubic meters of import capacity, which is expected to rise by 10 billion cubic meters with the terminals at Piombino and Ravenna.

“We will need another 4 billion cubic meters to have full energy security, Descalzi said. ( OilPrice.com )

It has built up stores equivalent to 97 days supply of gas although I doubt that is usage at the rate of the current cold snap in Europe. But this issue remains.

Italy imported about 16% of its electric power supply in 2016. About half of Italy’s imports of electricity came from France. ( EIA)

It imported some 32 Terawatt hours in 2020. 

On the other side of the coin it does have some storage capacity to smooth over short-term issues.

According to the TSO, the current storage capacity of 7.5 GW would need to more than double by 2030 if Italy is to meet its renewables targets, with significant contributions from both pumped hydro and distributed electrochemical storage. ( IEA)

As a final point is it rude to point out how much the ECB and Bank of Italy are losing on their holdings of Italian government bonds?

Australia is facing up to the consequences of Forward Guidance being so wrong about interest-rates

Today our focus switches to a land down under as we note that its central bank has again raised interest-rates.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.10 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.00 per cent.

So the initial point is that 0.25% has become the new standard for the Reserve Bank of Australia confirming what we thought last time around. From November 1st.

The basic point is that one of the stronger world economies is in the midst of what has become called the “pivot” on interest-rates. 

So we have one of the stronger world economies which in interest-rate terms has dropped from striding out to a jog. Also they show that this has been something of a shambles by ending up with an interest-rate of 3.1% long after even they must have lost faith in moves of 0.1% being significant.

That point is reinforced by this.

Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role…..

A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter.

As you can see there is a around 5% gap between interest-rates and inflation and although they would be hoping no-one would put it like this. It was the RBA which did it.

 Returning inflation to target requires a more sustainable balance between demand and supply.

You do not need to take my word for it as here is the RBA from a year ago.

The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. 

Indeed they made a special point of saying there was no inflation in prospect.

While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia. 

As to interest-rate increases well they were apparently a long way in the distance. The emphasis is mine.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient.

I hope that very few Australians took any notice of this poor piece of Forward Guidance.

Fantasy Time

If Australians are finding things difficult to afford then they can retreat to the world of central banking economic models where everything is just fine and dandy.

Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.

As Earth Wind & Fire so aptly put it.

Every man has a place, in his heart there’s a spaceAnd the world can’t erase his fantasiesTake a ride in the sky, on our ship, FantasyAll your dreams will come true, right away.


The lack of wage growth they were confident about last year has morphed into this.

Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

House Prices

In the end central banking policy invariably comes down to this. Or as I put it on November 1st, Australia is pivoting on interest-rates because of fears about house prices. Here is how the RBA puts it.

The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments.

Not that much of a lag though, if Reuters are correct.

(Reuters) – All of Australia’s “big four” banks said on Tuesday they will raise their home loan rates by a quarter-point, passing on the central bank’s eighth rate hike in as many months to their customers in full……..

The top four lenders, the Commonwealth Bank of Australia, National Australia Bank and Australia and New Zealand Banking Group’s will hike their rates from the end of next week, while Westpac Banking Corp’s hike will be effective December 20, the banks said in separate statements.

As to what house prices are doing the Australian Broadcasting Corporation is on the case.

Property data firm CoreLogic said home values across the country fell a further 1 per cent in November from a month earlier, with the median home price now at $714,475. 

Distributed like this.

Brisbane and Hobart led the falls (-2 per cent), followed by Sydney (-1.3 per cent), Canberra (-1.2 per cent), Melbourne (-0.8 per cent) and Adelaide (-0.3 per cent).

Perth was flat, while Darwin values rose 0.2 per cent.

There may well be a challenge next year as those who were sensible and ignored the Forward Guidance of the RBA also begin to get caught by its interest-rate rises.

We’re still going to see a real test to the market in 2023, when a lot of people who secured long, low-mortgage rates on fixed terms are rolling off into an environment where average mortgage rates might be between 5-6 per cent.”

That means that mortgage rates in Australia will be lower than in the US but pretty similar to where I expect the UK to be. 

In case all of this is just too depressing for a modern central banker they can still cling to this.

CoreLogic’s data also shows housing values across most of Australia have moved through a peak following a massive rise in dwelling values since the start of pandemic.

“So nationally, home values are still 17 per cent higher than when they were at the onset of COVID-19. 

So they can still claim wealth effects.


If we return to the issue of the failure of Forward Guidance from the RBA then its review last month put things like this.

The RBA attracted extensive criticism when the cash rate was increased much earlier than implied by the conditional time-based guidance.

The Daily Telegraph has a different perspective on it.

Mr Lowe first flagged that the RBA was not “not expecting to increase the cash rate for at least three years” on November 3 2020, in a prepared statement after the board’s decision to lower the cash rate to 0.1 per cent.
The following month a record 46,921 fresh loans worth a combined $22.3 billion were written nationwide, according to Australian Bureau of Statistics figures, up from 40,328 in the month before his flawed forecast. More than 85 per cent of the loans were variable-rate, ABS data shows.
The December record was then trumped in March 2021, after Mr Lowe used a speech to advise would-be borrowers “the cash rate is very likely to remain at its current level until at least 2024.”
More than 48,000 mortgages were struck in that month – a level that has not been breached since. About four-fifths of these loans were variable-rate.

They should have been reading me! They would then know not to rely on the words of central bankers. 

So we have an economy where interest-rates have been raised but the central bank is increasingly getting cold feet about the impact of them on house prices. Especially as it encouraged the housing market. Whilst individuals should take responsibility for their actions it is also true that this was presented as expert guidance as opposed to the out turn of it being misleading.


Are the Swedes back to being sadomonetarists?

This week has been one where many of our themes are in play but we can start with a reference to a claim by Paul Krugman of the New York Times about the Riksbank of Sweden.

“At least as I define it, sadomonetarism is an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low,”

That statement did affect the Riksbank which reversed policy and took Sweden into the icy cold world of negative interest-rates. As we stand the era of ever lower interest-rates has created quite a few problems so in fact there was a point to being concerned about low interest-rates. Indeed they were persisted with when unemployment was low and inflation rising.

Moving onto today we can start with another example of central bankers being pack animals.

To bring down inflation and safeguard the inflation target, the Executive Board has decided to raise the policy rate by 0.75 percentage points to 2.5 per cent. ( Riksbank)

Everyone is now matching the Fed and it does seem to have impacted the US Dollar trend as we thought it would. Also there is something called the Rikshog which has finally happened. Thank you to Martin Enlund for the chart.

As you can see the Riksbank spent many years telling people it would raise interest-rates and didn’t. Whereas once it stopped forecasting that it did. I would say you couldn’t make it up but of course they did! Even worse they had the cheek to call it Forward Guidance when it was anything but.


This is the cause of the change in tack as it makes its impact around much of the world.

In Sweden, too, inflation is still too high. In October, CPIF inflation was 9.3 per cent. This was somewhat below the Riksbank’s forecast in September, but is entirely due to energy prices being lower than expected.

This does leave them with rather a problem though because if they thought inflation would be higher than 9.3% what were they doing having an interest-rate of only 1.75%? We do get a sort of confession here although they do not put it like that.

Demand recovered rapidly after the pandemic and activity in the Swedish economy has been unexpectedly high so far
this year, with a strong development on the labour market.

In itself that is a good thing but rather ironically their Forward Guidance failed to think ahead to the likely consequences.

The good development in demand has meant that companies have to a large degree had the opportunity to pass on their cost increases to consumer prices
and have in this way contributed to the broad upturn in prices.

That is pretty basic central banking ( taking away the punch bowl as the party gets going) but they thought they knew better.

They Promise More More More

After the Rikshog above you may want rather more than a pinch of salt with this.

The policy rate is expected to be raised further at the beginning of next year to then be just under 3 per cent.

Actually that is not very much and they are quite specific in some of the detail at 2.84%. In itself that is quite ridiculous precision from a body that has just got it completely wrong. They are back to their usual fallback which is to prefer their economic models to reality.

Inflation in Sweden has risen rapidly to a very high level, which we have not seen since the beginning of the 1990s, when the inflation target was introduced, but the long-term inflation expectations have remained stable.

As they have just showed they cannot look forwards even 6 months this is derisory stuff. Oh and if it does not work well it is everybody else’s fault.

The Riksbank is determined to bring down inflation. The speed at which this can be attained and the degree of monetary policy tightening this requires will depend,
among other things, on what inflation expectations price-setters and wage negotiators base their actions on.

House Prices

We always end up here if we look at central banking analysis and the truth is central banks act as if they start here. We can begin a little euphemistically.

Interest-rate sensitivity is higher than before in the Swedish economy, and there is considerable uncertainty regarding the way that heavily indebted households in Sweden will be affected by rising interest rates.

How has that happened? Well swedishbankers.se helps out.

According to Statistics Sweden’s Financial Market Statistics, total lending secured by single-family
homes, tenant-owned apartments and apartment buildings amounted to SEK 5,193 billion at the end of
June 2022. Three years ago, in June 2019, the corresponding figure was SEK 4,314 billion. Lending has
thus increased by SEK 879 billion, or 20 percent, in three years.

Some might think that the low interest-rates Paul Krugman was so keen on were the biggest factor here.

.In the longer term, too, interest rates have fallen. Until the beginning of 2022 the initial fixed rates have dropped
to the lowest levels since at least 1985. Variable interest rates are also at historically low levels.

Now the situation has changed partly in response to the previous interest-rate rises and the Riksbank puts it like this.

.Housing prices have already fallen substantially from the peak at the beginning of the year. The Riksbank’s forecast is that they will continue to fall in the coming years, to around the level prevailing prior to the pandemic.

For newer readers it is all about the “Wealth Effects” or rather an expected reverse for them.

Developments on the Swedish housing market comprise a risk for domestic demand in the coming years.

The Krona

The Riksbank seems to be lost in a land of confusion here.

Over the year, the krona has weakened, which is probably largely connected to the difficulty in predicting the outlook for inflation and economic activity.

Okay so the era of King Dollar has added to inflation which is logical, But then it seems to have disappeared.

At the same time, it is worth pointing out that the krona´s exchange rate has not had a crucial bearing on
the sharply rising inflation this year and it is not expected to have any decisive effect on the clear fall in inflation next year.

Then it returns as quickly as it went.

If the krona appreciation in the current forecast
does not occur, however, it may be somewhat more difficult to bring inflation down to the target.


So we see a rise to 2.5% and guidance towards but not quite 3%. This will impact because if we look at the specifics Sweden has been heading in the opposite direction to the UK.

During the period from January to June 2022, 55 percent of new home loans taken out by households
had variable interest rates. During the spring of 2022, the share of households’ new mortgages with variable interest rate has started to increase. ( swedishbankers.se)

Perhaps they listened to the Forward Guidance of their central bank. If so it has just shafted them if I may be permitted a technical term.

As the initial fixed mortgage interest rates have increased more than the variable mortgage interest rates,
demand for the variable interest rates has increased.

If the alternative scenario of inflation being sticky and interest-rates going to 4.65% should happen then they will be royally shafted. Which means that this will be an understatement.

GDP is expected to shrink in 2023, which is visible in the labour market, where the employment rate is falling and
unemployment is rising.

Oh and at these interest-rates its own balance sheet is becoming rather expensive.

The Riksbank’s asset holdings as motivated for monetary policy purposes were around SEK 860 billion in mid-November. Purchases will cease at the end of the
year and securities holdings will thereafter gradually decrease through maturities

New Zealand accepts house price falls and recession to protect the Kiwi Dollar

Today I am returning to s subject which was rather exercising me on Saturday evening. To be precise it was 71 minutes of pain followed by 9 minutes of delight as I watched England play the All Blacks at rugby. It was a curious way to end up at a draw but now in a rugby obsessed country we see this.

The Monetary Policy Committee today increased
the Official Cash Rate (OCR) from 3.5 percent to
4.25 percent.

Although that has become something of the recent standard for interest-rate rises it is in fact a record for the Reserve Bank of New Zealand. Such was their concern they considered setting an even clearer record for a rise.

The Committee gave consideration to an increase in
the OCR of 75 or 100 basis points. On the balance of risks, the Committee agreed that a 75 basis point increase was appropriate at this meeting.

A large driver of this was probably simply that as I have pointed out many times central bankers are pack animals and thus 0.75% was likely to win out. Also this brings in my generic critique that you should start with larger increases and then fine-tune so they have got their speed of travel wrong. This is especially awkward when you start too late. Also it is an issue that central banks were made independent to avoid, and has thus failed.


We get our first clue about trouble here as we repeat the pack animal behaviour.

The Committee remains
resolute in achieving the Monetary Policy Remit.

In terms of further detail we are told this.

The Committee observed that consumer price inflation in
New Zealand in the September quarter was significantly stronger than expected. Measures of core inflation continued to rise and price pressures broadened.

If we switch to the numbers we see this.

The consumers price index increased 7.2 percent annually in the September 2022 quarter, Stats NZ said today.

The 7.2 percent increase follows an annual increase of 7.3 percent in the June 2022 quarter, and an annual increase of 6.9 percent in the March 2022 quarter.

So in terms of context it was 4.2% above the upper band for the target and 5,2% above the mid-range. Also whilst 0.1% is within the margin of error it was a drop which makes the apparent central banking panic a little curious. Perhaps the more recent update on food inflation gave them a nudge.

Food prices were 10.1 percent higher in October 2022 compared with October 2021, Stats NZ said today.

“This was the highest annual increase since November 2008,” consumer prices senior manager Nicola Growden said.

It would be rather awkward if the RBNZ was responding to what central banks have argued is a “non-core” item for many years, but maybe they were hoping it would not be spotted.

On the other side of the coin last Thursday’s producer price numbers showed a slowing of inflationary pressure.

Producer output and input prices have increased in the September 2022 quarter, Stats NZ said today.

In the September 2022 quarter prices received by producers of goods and services (outputs) increased 1.6 percent compared with the June 2022 quarter. Prices paid by producers of goods and services (inputs) increased 0.8 percent over the same period.

So the output numbers have gone 2.6%, 2,4% and now 1.6% which shows signs of a fading. That is reinforced by the input numbers which after a couple of 3 percent plus numbers has fallen to 0.8% suggesting a weaker output number next time around. Perhaps they feel that the fall in energy prices will not last.

Offsetting this was a fall of 23.2 percent in prices paid by producers in the electricity and gas supply industry.

That is awkward because it would mean that their new enthusiasm for higher interest-rate rises would be due to food and energy which are for central bankers non-core. Could we have a bonfire of the research papers?


Those who argue that central banks also target wage growth will get some food for thought from this.

Average ordinary hourly earnings, as measured by the Quarterly Employment Survey (QES), increased to $37.86, an annual increase of $2.61 or 7.4 percent.

“This is the largest annual rise in ordinary time hourly earnings since this series began in 1989,” international and business performance statistics senior manager Darren Allan said.

Although less so from this.

The LCI’s all salary and wage rates (including overtime) index rose by 3.7 percent, the second highest annual increase since the series began in 1993.

As to the gap well this is part of it.

The LCI’s primary measure of wage inflation adjusts for changes in employment quality. Therefore, employees receiving promotions or moving to different roles do not affect this measure of wage inflation.

Without it the LCI would have been 5.3%.

House Prices

Here we have seen this.

The REINZ House Price Index (HPI) for New Zealand, which measures the changing value of residential
property nationwide, showed an annual decrease of 10.9% from 4,200 in October 2021 to 3,744 — down
12.4% from its peak in November 2021.
New Zealand saw a 0.2% increase in terms of HPI month-on-month movement.

Which the central bank puts like this.

Although New Zealand house prices have now declined by about 11 percent since the November 2021 peak, household
wealth in the June 2022 quarter was still 15 percent higher than at the end of 2020.

So as they would consider it we still have wealth effects from past house price rises. A chill must have gone down their collective spines when they calculated this.

The central projection assumes that house prices will decline by 20 percent in total from the November 2021 peak.

In terms of affordability things now will be tighter than the numbers below which are from the Financial Stability Report of the 2nd of this month.

Among households with mortgages, the average percentage
of disposable income dedicated to debt servicing is expected to rise from a recent low of 9 percent to 20 percent, based
on current mortgage rates.

Some will be particularly hard hit.

. Repayment
increases will be particularly significant for
many households that first borrowed in the
past two years.

That will be especially tough for these.

The decline in prices means that some
borrowers who purchased houses in 2021
are now in negative equity, meaning their
mortgages are larger than the current market
value of their property.

I note that they had used 6% mortgages rates as a benchmark ( presumably thinking we would not see that). Whereas according to the NZ Herald it is arriving for some.

Based on a current average fixed mortgage rate across the stock of loans of 3.8 per cent, the fortnightly mortgage repayment for every $100,000 of debt (30-year term) is around $215 – or roughly $5590 per year, Davidson noted.

“But somebody then refinancing to a current rate of 6 per cent would see that repayment jump by $1602 per year – or more than $8000 if they had a $500,000 loan.


The RBNZ deserves some credit for acting earlier than many of its peers. Although that makes today’s decision a little more curious as its actions back then should be starting to impact. I think that we return to the issue of the US Dollar and matching the moves of the Federal Reserve.

In relation to New Zealand’s goods exports, members observed that a lower New Zealand dollar is
currently mitigating the impact of recent declines in international commodity prices.

Now they find themselves adjusting monetary policy for the external component and are willing to sacrifice the Holy Grail of higher house prices. Of course having previously pumped them up they will be leaving more than a few with a much worse cost of living situation and some with negative equity. Speaking of negative equity the RNBZ will have that as well as it will be paying 4.25% on its bond holdings.

These initiatives have enlarged our balance sheet from its December 2019 (pre-COVID-19) level of $24.60bn to $97.89bn at the end of October 2022.

Still at least their inflation-linked bonds will be doing well. What a masterpiece of investment planning!

Returning to the economy things again get awkward because the consequence of them “saving” the economy in the pandemic is apparently this.

Members noted that a reduction in aggregate demand is projected to cause GDP in the New Zealand economy to temporarily contract by around 1% from 2023.

Ah temporarily……


UK house price falls look likely to build up a head of steam

This morning has brought further confirmation of something that will be very unpopular at the Bank of England. It’s research students will have been in at the crack of dawn in an attempt to avoid having to present at the morning meeting and have Governor Andrew Bailey frown at them as they say this.

“Average house prices fell in October, the third such decrease in the past four months. The drop of -0.4% is the
sharpest we have seen since February 2021, taking the typical property price to a five-month low of £292,598.” ( Halifax )

No amount of mathematical torturing of the figures will allow them to sugar the unpleasant taste in the Governor’s mouth. Although no doubt they will try to emphasise the fact that year on year growth remains.

While the pace of annual growth also continued to ease, to +8.3% compared to +9.8% in September, average
prices remain near record highs.

Plus perhaps a reminder of how much house prices have risen under his wise and benevolent Governorship.

Though the recent period of rapid house price inflation may now be at an end, it’s important to keep this is
context, with average property prices rising more than £22,000 in the past 12 months, and by almost £60,000
(+25.7%) over the last three years, which is significant.

If we return from the rarified air at the Bank of England a cold blast of reality reminds us that this was quite a blast of inflation that the official targeted measure of inflation ignores. Or if you prefer has spent more than 20 years forgetting to include. If you want more details on this I analysed this last Monday ( 31st of October).

The winds of change seem to have upset the media as well.

UK house prices fall at fastest rate since February 2021 ( Sharecast)

As they have been soaring that would be true of almost any decline.

What has caused this?

According to the Halifax this.

While a post-pandemic slowdown was expected, there’s no doubt the housing market received a significant
shock as a result of the mini-budget which saw a sudden acceleration in mortgage rate increases.

Personally I think it is too early for that to have had much of an impact whereas this seems much more solid.

Understandably we have also seen consumer caution grow, as industry data shows mortgage approvals and
demand for borrowing declining. The rising cost of living coupled with already stretched mortgage affordability is
expected to continue to weigh on activity levels. With tax rises and spending cuts expected in the Autumn
Statement, economic headwinds point to a much slower period for house prices.

They have touched on one of our themes there along the way. Remember when we kept being assured mortgage affordability was fine? That was only true because mortgage rates were so low and of course the Bank of England response to the pandemic pushed them below even such levels. This was always going to affect first-time buyers relatively more.

More notable was the drop in property prices for first-time buyers. Annual growth fell to +7.5% in October from
+10.1% in September. Given the greater challenges for first-time buyers in deposit-raising, plus tighter
requirements for higher loan-to-value mortgages, the relatively faster slowdown in prices is not surprising.

Mortgage Rates

It’s money and credit release at the end of last month showed us that the heat was on before the mini-Budget furore.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 29 basis points to 2.84% in September, the largest monthly increase since December 2021 when Bank Rate began rising. The rate on the outstanding stock of mortgages increased by 7 basis points, to 2.24%.

Since then it has acted in opposite directions on mortgage rates. Whilst these days only around a fifth of mortgages are variable-rate they will have been affected by this last week.

At its meeting ending on 2 November 2022, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.75 percentage points, to 3%.

Also as the latest meeting Minutes point out October saw some wild swings for fixed-rate mortgages.

Lending rates for new mortgages had increased sharply since the MPC’s previous meeting, reflecting the sharp rise in risk-free market rates during the period as well as increases since the August Report. The monthly average quoted rate on a two-year fixed-rate 75% loan-to-value (LTV) mortgage had increased from 3.6% in August, to 4.2% in September. Preliminary data suggested that the rate had increased significantly further to 6.0% in October, its highest rate since 2008.

The Bank of England bought some £19.3 billion of longer-dated UK government bonds to help calm all that down. But we remain in a situation where mortgage rates are now considerably higher.

New figures from Moneyfacts show that the average two-year fix fell 3 basis points, to 6.45%, and the average fix for a three-year fix was not far behind, dropping 2 basis points, to 6.74%.

At the same time, the five-year fix lost 6 basis points, going to 6.28%, and the average rate for a 10-year fix ticked down a single basis point to 5.62%. ( Mortgage Strategy)

This is why we saw a rather bizarre phase in the Bank of England press conference on Thursday when Governor Andrew Bailey got very near to promising listeners that mortgage-rates would soon be lower. Apart from the obvious issue that he had just raised variable mortgage-rates it was curious to say the least to hear a man who has been wrong on so much giving Forward Guidance on future mortgage-rates. Especially as in his formal statement he had told us this.

There are, however, considerable uncertainties around the outlook. If the outlook suggests more persistent inflation pressures, the Committee will respond forcefully, as necessary.


Up until this month the UK house price situation was rather defying reality a bit like when Wily E Coyote ran over the edge of a cliff. For a while he hangs there until gravity gets a hold on him. Today’s news adds to what we were told earlier this month by the Nationwide.

Prices fell by 0.9% month-on-month, after taking account of seasonal effects, the first such fall since July 2021 and the largest since June 2020.

There has been a slow squeeze via mortgage rates which were 1.74% for new mortgage rates 2 years ago and 1.78% a year ago as opposed to 2.84% in September.  It appears that such rises have begun to turn the market and we now know that larger rises have been seen since.

On that basis I expect house prices to not only fall further but for the rate of fall to accelerate. Whilst it will be presented as something of an apocalypse let me point out that more than a few will gain from it.

Falling house prices and higher returns on savings, could lower barriers to home ownership for the next generation of first-time buyers. A fall of 8 per cent would reduce the average length of time to save for a deposit from 15 years in 2022 to 13 years in 2023. ( Resolution Foundation)


The Bank of England misleads on inflation as the money supply surges

This week it is the Bank of England which is in focus as there are quite a few matters on its plate. On Wednesday night it will vote on how much to increase UK interest-rates via its own Bank Rate. At the peak of the crisis around a month ago some market expectations were for increases of 2% but as time has passed they have faded quite a bit and things are more in line with the move of 0.75% by the ECB last week. Of course the US Federal Reserve may throw a spanner in the works and I presume they will have the sense to wait for its vote on Wednesday evening before voting themselves.

Also they have decided to ignore my advice and press ahead with some active bond sales or Quantitative Tightening. Although if you look at the plan you can see that they have modified in somewhat presumably due to nerves about its impact.

  1. These sales will begin on Tuesday 1 November, ending on Thursday 8 December 2022.
  2. These gilt sale operations will be distributed evenly across the short and medium maturity sectors only.
  3. The Bank will conduct eight sale operations across each of these two maturity sectors (four in each), with a planned size of £750mn per auction. The dates for the individual auctions are specified in the table below.

So the sales start tomorrow but with a short-dated operation ( 3-7 years maturity) and next Monday will see a medium-dated operation.  The total size will be £6 billion. So the size has been reduced from the initial plans as well. The estimate of £80 billion per annum suggested £20 billion per quarter rather than the £6 billion we are getting. Also there are no longer dated Gilts being sold which reminds me of the £19.3 billion of long-dated bonds that the Bank of England bought in late September and early October.. What will happen to them?

The Bank’s approach to the unwind of the stock of gilts purchased in the course of its recent temporary and targeted financial stability operations will be confirmed separately in due course.

Oh and in case you did not believe the plans had changed here is the official denial.

As set out previously, the MPC’s decision at its September meeting to reduce the stock of purchased gilts is unaffected and unchanged.

Assuming the QT happens then rather than the implied £20 billion reduction in its bond holdings there will be £13.3 billion more. Also there will have been an “Operation Twist” style move as it sells shorter-dated bonds and previously bought longer-dated ones. So it has increased its own interest-rate exposure just as it is raising interest-rates. Genius!

Oh and I did say they are nervous.

The Bank will closely monitor the impact of this gilt sales programme on market conditions, and reserves the right to amend its schedule, including the gilts to be sold and the size of its auctions, or any other aspects of its approach at its sole discretion.

Problems with inflation

Via its Bank Underground website we have been treated to a new analysis of inflation. I had an issue with the title and the first two words so I did not get very far. Anyway they do not have much of an open door policy to comments because I made mine on Thursday lunchtime and they have not appeared. So here is the title and the first 2 words followed by my reply.

How broad-based is the increase in UK inflation?

CPI inflation

Thank you for the post which is interesting.


However by putting “broad based” in the title and then “inflation”  there is the implication that your analysis is of that form. However by using the flawed CPI inflation measure that implication ends with the first two words of the post.


For those unaware the CPI inflation measure ignores owner-occupied housing which is a large part of people’s overall spending and hence experience of inflation.  Estimate’s of the size vary but for example the US Bureau of Labor Statistics puts it at 23.8%. So an analysis ignoring this is already looking away from what is a large part of people’s experience of inflation.


One can take that further because if we look at the statistics we have then we see this.


“UK average house prices increased by 13.6% over the year to August 2022…….On a seasonally adjusted basis, average house prices in the UK increased by 1.1% between July and August 2022, ” ( Office for National Statistics or ONS)


Many owner-occupiers will also be affected by mortgage costs. On a basic level they have been in the media pretty much everywhere which gives us a clue. But the ONS also calculates a number for mortgage interest payments and they were up by 19.7% over the past year.


As you can see the inflation picture changes once these are included rather than ignored. But there is more and we do not have to leave the topic of housing.This is because the CPI measure does include rents but sadly due to the way it has a 14 month stock of rents it is in fact giving us rents from 2021 rather than 2022, I am sure that the fast rise in London rents is a topic discussed amongst Bank of England staff but the official statistics instead live in this rather different reality.


“Private rental prices in London increased by 2.8% in the 12 months to September 2022, up from an increase of 2.5% in August 2022……… Despite this, London’s rental price growth in September 2022 remains the lowest of all English regions.”


How would your analysis change if we add in these elements to more accurately reflect the inflation picture?


Thank you


Shaun Richards

Money Supply Surges

We saw a consequence of the pension fund problem at the end of September as they undertook the electronic equivalent of a dash for cash.

The flow of sterling money (known as M4ex) increased sharply to £ 74.4 billion in September, from £4.4 billion in August. This was mostly driven by flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money increasing to £67.8 billion in September from -£3.4 billion in August.

In fact they borrowed some money too as some £19.3 billion of the borrowing below was them too.

The flow of sterling net lending to private sector companies and households, or M4Lex, also rose, to £25.9 billion in September from £4.2 billion in August.

So we had money supply growth of 2.7% on the month raising the annual rate to 7%!


So far mortgage lending has ignored the rises in mortgage rates.

Net borrowing of mortgage debt by individuals remained at £6.1 billion in September (Chart 1). This is above the past 6-month average of £5.7 billion.

But there was a warning signal of changes to come.

Approvals for house purchases, an indicator of future borrowing, decreased significantly to 66,800 in September, from 74,400 in August, but were above the past 6-month average of 67,200.

But the interest-rate beat went on and we know that a bit of a turbo-charger was applied in October.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 29 basis points to 2.84% in September, the largest monthly increase since December 2021 when Bank Rate began rising.

Consumer Credit

This headed in the other direction in September.

Individuals borrowed an additional £0.7 billion in consumer credit in September, on net, following £1.2 billion of borrowing in August. This was the lowest level since December 2021 (£0.3 billion).

It was new credit card borrowing which faded to £100 million while this picked up.

£0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans).

I am not sure how relevant the mention of car dealership finance is. It has become more frequent but we get so little detail.

Maybe people had time to note the wide difference in interest-rates charged,

The effective rate on new personal loans to individuals decreased by 13 basis points to 6.75% in September, but remained higher than the December 2021 rate of 6.27%. Conversely, the effective rate on interest bearing credit cards increased to 18.96% in September, and sits above the December 2021 rate of 17.86%.


So we arrive with a lot of contrary influences. We have QT but it is as Star Trek would put it “not as you know it” as it is much smaller in size this time around and concentrated at the shorter maturities. I suppose it would be typical of central bank language for QT to coincide with a larger balance sheet then before! Or as Diana Ross put it.

Upside downBoy, you turn meInside outAnd round and round

Next up we have interest-rates where they should match the ECB and presumably the Federal Reserve with 0.75%. But we know that Governor Bailey considers 0.5% to be something of a “bazooka”. That is of course evidence free but central bankers are not strong on evidence.

The money supply numbers will be especially interesting next month to see how much of the late September surge washes out of them.







It is the fear of falling house prices which are making central banks change course

It was only a few short weeks ago that the headlines were telling us this.

Traders ramped up wagers on the scale of interest-rate hikes by the Bank of England in the short term, to deal with markets in turmoil over the government’s economic plans.
Money markets priced in more than 200 basis points of increases by the BOE’s next meeting in November, four times the size of its last hike. The deposit rate currently stands at 2.25%.

That was Bloomberg on the 26th of September. I will return to the issue of what market prices tell us but at the time there was a warning as those panicking had Piers Morgan on their side.

The Bank of England will now have to urgently jack up interest rates more than necessary to repair damage of pound/dollar collapse carnage. This will worsen inflation. Great work @trussliz@KwasiKwarteng

In that day’s article I suggested a much calmer approach.

So another 1% is in the offing which I would do at the next meeting, and would be willing to do again at the one after if necessary. I say if necessary because I rather suspect things will be different then. So no at an inter meeting hike and no to intervention for now.

I was correct to point out that things were likely to change because look what happened yesterday,

Today, we raised the policy interest rate by 50 basis points to 3.75%.  ( Bank of Canada)

This was quite a change in that 0.75% was expected but not delivered and as regular readers are aware my view is that the Bank of Canada has simply been doing what it expects the US Federal Reserve to do. Of course it came with a lot of rhetoric.

We also expect our policy rate will need to rise further.

But also I note referred to this. I have emphasised a word not entirely randomly.

Third, higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy.

It may only be one word at first but later there is much more.

Higher mortgage rates have contributed to a sharp slowing in housing activity from unsustainable levels, and consumer and business spending on goods is moderating. This has led to declines in house prices and is exerting downward pressure on goods prices.

Perhaps they had been reading this.

Before seasonal adjustment, the Teranet–National Bank National Composite House Price IndexTM fell 3.1% from August to September, the largest monthly decline on record since the index began in 1999 and shattering the previous month’s record decline of 2.4%.

After seasonal adjustment, the Teranet–National Bank National Composite House Price IndexTM fell 2.0% from August to September, a monthly drop that equalled the previous month’s record and the fifth consecutive decline.

Although even such falls are merely slowing the annual rate of growth for now.

The Teranet–National Bank National Composite House Price IndexTM, covering eleven CMAs around the country, recorded an annual gain of 6.0% in September, the fifth consecutive month of lower growth than the previous month

If we return to the release from the Bank of Canada they refer to an issue we have noted on several occassions in the past.

Many households have significant debt loads, and higher interest rates add to their burden. We don’t want this transition to be more difficult than it has to be.


If we avert our gaze from across the Atlantic and instead switch to a land down under I recall this.

The arguments for a 25 basis point increase rested on the risks to global and domestic growth, and the potential for inflation to subside quickly.

That is from the minutes of the Reserve Bank of Australia meeting which were released last week. It did not take too long before they got to the main event.

The full effects of higher interest rates were yet to be felt in mortgage payments and the increases in the cash rate were close to the interest rate buffer applied when many current borrowers took out their loans. The tightening of monetary policy was having a clear effect in the housing market, where prices had declined after earlier large increases, and the demand for housing loans had also fallen.

It is kind of them to also confirm my long standing theme about central bankers being obsessed about wealth effects from housing.

Previous episodes of lower housing prices and turnover had seen a large effect on consumer spending, in part through the wealth channel of transmission.

Of course in this instance we are looking at negative wealth effects the very though of which keeps central bankers awake at night.

Bank of England

Let me now return to my home country and note that according to @financialjuice expectations are now very different.


So 1.25% has gone missing! We can also note that a lot of things have changed with the UK Pound £ above US $1.15 and mentions of UK bond yields have collapsed. If we look internationally the new environment even has the intervention of the Bank of Japan working as it is around 146. Well partly working anyway as it is still above the level at which it first intervened in late September.

My contention is that the recent moves by the Bank of England were all essentially around the mortgage market and house prices and that includes this from the absent-minded professor last week.

If Bank Rate really were to reach 5¼%, given reasonable policy multipliers, the cumulative impact on GDP of the entire hiking cycle would be just under 5% – of which only around one quarter has already come through.

Back, yes you have guessed it to mortgage rates and the housing market or as Yalking Heads put it.

Same as it ever was

Same as it ever was


Today has been on a central theme of my work which is that monetary policy is mostly and sometimes entirely about house prices. Life has changed for central banks in this regard because of the switch in many places from variable-rate mortgages to fixed-rate ones. So when they thought they were being clever with “open mouth operations” that raised interest-rate expectations they are now coming to terms with the fact that from their own perspective it was not clever to ramp mortgage-rates. Hence the change in policy from Canada and Australia.

At this stage we are only getting a reduction in the size of the increases but how long will it take for that to turn into actual cuts in interest-rates?



If the US is to pivot on interest-rates it will be mortgage rates than did it

There have been 2 major economic themes so far this year. The first is the rise in inflation and hence the cost of living and the second has been the rise and indeed rise of the US Dollar. These are linked in so many ways as for us in the rest of the world commodities are priced in US Dollars meaning it was making them even more expensive. But if we look at the United States itself we see that it is the interest-rate increases combined with the promises of more of them, that has driven the US Dollar higher. So the cure for the US creates more trouble for the rest of us and that is before I get to the issue that the sensible for other central banks is simply to match the Federal Reserve. So we get higher interest-rates and bond yields too.

On Friday though we got the first hint that there may be what the Scorpions called the “Winds of Change” as I note this.

Federal Reserve officials are barreling toward another interest-rate rise of 0.75 percentage point at their meeting Nov. 1-2 and are likely to debate then whether and how to signal plans to approve a smaller increase in December.

That was from Nick Timiraos in the Wall Street Journal and for newer readers he is the journalist who the Federal Reserve speak to when they want a story placed in the media. So at a time of many “sauces” he has been a bona fide one.

Until now the hammer has been down and it was expected to continue and the Fed has encouraged this.

The Fed has raised its benchmark federal-funds rate by 0.75 point at each of its past three meetings, most recently in September, bringing the rate to a range between 3% and 3.25%. Officials are raising rates at the most aggressive pace since the early 1980s. Until June, they hadn’t raised rates by 0.75 point since 1994.

I would take care with the comparisons over time as they have not be raising interest-rates that much at all! But they were trying to convince us that they had set a pace like a long-distance runner and would stick to it.

Cleveland Fed President Loretta Mester has signaled she would favor rate rises of 0.75 point at each of the Fed’s next two meetings because there hasn’t been progress on inflation. “We can’t let wishful thinking drive our policy decisions,” she said on Oct. 6.

That was a world which had seen the US ten-year yield rise to a new peak of 4.34% on Friday. Whereas now we are being told this.

If officials are entertaining a half-point rate rise in December, they would want to prepare investors for that decision in the weeks after their Nov. 1-2 meeting without prompting another sustained rally.

This is a much bigger issue that merely 0.25% less than expected because investors would start to project fewer rises and maybe even cuts next year. Actually it seemed some already were on Friday.

The S&P 500 closed up 2.4% on Friday, with all 11 sectors posting gains.

US Mortgage Rates

If we look for a trigger for the apparent change of view at the Fed it seems likely to be this.

Currently P&I is up about 59% year-over-year for a fixed amount (this doesn’t take into account the change in house prices). This is above the previous record increase of 50% in 1980.  This assumed a fixed loan amount – if we add in the year-over-year increase in house prices, payments would be up over 70% YoY for the same house. ( Calculated Risk)

So mortgage payments are soaring and the US Federal Reserve must be so grateful that mortgage costs are not in the US inflation measures. After all why would you put in a number owner-occupiers do pay when you can put in one they do not? Using imputed rents has reduced the recorded inflation numbers.

A problem arises though when you return to the real world as new buyers and those remortgaging are both unlucky and facing quite a squeeze  However desperately the Fed tries it will never find anyone lucky enough to pay one of its Imputed Rents. Oh and just to add they are something of a fantasy for those who do pay rent as well as I looked at on the 14th of October.

This implies, however, that we should expect the CPI in rents to converge in levels to the other price indexes. This is extremely worrying. While growth is converging (shown above), the market indexes remain around 14% higher than the CPI for rents.

So it is quite possible that both renters and home owners have told the Fed that the real world is a lot tougher than its models with their fantasy numbers.

The Economy

As it stands it looks okay.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 2.9 percent on October 19, up from 2.8 percent on October 14. After recent releases from the Federal Reserve Board of Governors and the US Census Bureau, the nowcast of third-quarter real gross private domestic investment growth increased from -3.6 percent to -3.3 percent.

So 0.7% in our terms although we do need to recall for perspective that the US economy shrank in the first two quarters of this year. Also we need to look ahead to late next year and 2024 to allow for leads and lags in the response to monetary policy. Although some do not seem to realise this.

Welcome to Hikelandia, where inflation just won’t budge ( The Economist)

Bank of Japan

I think that it caught the mood music and that is why it intervened on Friday and why it did so earlier this morning. Maybe they were too early in the cycle as the Yen has again strengthened ( 149.4 as I type this). But I think they are hoping for a change in interest-rate policy and may even have got something of a nod.

FX Swaps

These have reappeared.

Huw Roberts, head of analytics at Quant Insight in London, reckons the problems at Credit Suisse CSGN.S are behind the surge in Swiss demand for dollars. He notes that the SNB last week drew $6.3 billion from the U.S. Fed’s currency swap line facility, roughly double the amount drawn a week earlier. ( Reuters)

There is an arbitrage trade on here.

This year there’s an added twist: the Swiss franc basis has blown out to levels not seen for years.

In itself this is simply an arbitrage trade but it does pose a  few questions. Essentially we are left with the Carly Simon critique.

Why does your love hurt so much?Why?Why does your love hurt so much?Don’t know why


We seem to be approaching the point where the US Federal Reserve looks ahead and does not like what it sees.  We have learned over time that central banks prioritise the housing market and there we are seeing quite a squeeze being applied. So I would expect that to be the source of any change of strategy.

We can now also add in things that the Fed did not know when it was leaking this. Some of the moves in China over the weekend were too political for me but we can note this.

Hong Kong closing to drop about -7%. Question, when was the last time it dropped this much since 2010? Well, only today. Only today. We gotta go back to the GFC (2008) to get those huge intraday drops. ( @Trinhonomics)

Also it would appear that the foreign exchange intervention by Japan is struggling.


I counsel not over emphasising these issues as the Fed sets policy for the US and ignores the rest of the world. But they do have potential implications for the US.