Money Supply growth has both ramped Bitcoin and made it even more unstable

Let me welcome you to 2021 as the main financial trading year catches up with the calendar one. It is a time of year to mull whether the Who will be right or not?

Meet the new boss
Same as the old boss

The good news comes from the vaccine rollout with the Oxford vaccine programme beginning today and the bad from the case numbers in the UK which seem set to add to the restrictions on our lives.What can central banks  do about it well they can visit the outer limits of monetary policy as below.

The Central Bank of Egypt (CBE) has launched a new EGP 15bn initiative to finance the dual-fuel vehicle conversion plan, with a lump-sum return of 3%.
In a Sunday letter to banks, the CBE said that the initiative aims to support the government’s ambitious, recently announced multi-year plan to replace car engines powered by traditional fossil fuels with dual-fuel engines that run on both petrol and natural gas.

Accordingly, the central bank will provide the needed financing through this initiative at low-interest rates.

Its Board of Directors approved the decision, with the financing to be made available through banks at a flat return rate of 3% used in granting loans. ( alnaasher.com)

That sort of mission creep will no doubt be copied by others and is one of the factors behind this development which has really gathered pace in the new year.

Bitcoin climbed above $34,000 for the first time on Sunday, extending a record-breaking rally in the volatile cryptocurrency that delivered a more than 300 per cent gain last year. With trading in key financial markets yet to commence in 2021, bitcoin has resumed its dizzying ascent, rising more than 10 per cent in the first few days of January. By late afternoon in London on Sunday, it had given up some of its early gains to dip just below $33,000. ( Financial Times)

As so often they are rather tardy whereas back on November 17th when the price was half of what it is now I pointed out this.

Another way of looking at the change in perception of Bitcoin is the way that central banks are now looking at Digital Coins in a type of spoiler move as it poses a potential challenge to their monopoly over money.

The price is volatile and there are dangers in using a marginal price for an average concept but a “value” of over US $600 billion will be giving central bankers itchy shirt collars. Also frankly it is another sign of inflation.

UK Money Supply

Let me pivot now to a factor behind this announced by the Bank of England this morning.

Overall, private sector companies and households significantly increased their holdings of money in November. Sterling money (known as M4ex) increased by £31.9 billion in November; broadly in line with October which saw holdings increase by £33.5 billion. This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £41.1 billion on average each month.

That takes the annual rate of growth of the Bank of England’s preferred money supply measure to 13.9%. This is significant not only for the rate itself which in theory feed straight into nominal economic growth but because it comes on the back of an inflated money supply which now totals some £2.53 trillion. Or as MARRS observed.

Pump up the volume
Pump up the volume
Pump up the volume
Pump up the volume

If we switch back to Bitcoin we see another factor in its rise. UK money supply is only a bit part player but we see similar ramping of the money supply pretty much everywhere we look. I get regularly asked where it goes? Also where the inflation is? Well…..

House Prices

Whilst we were off on holiday ( a stay at home one) the Nationwide released this.

“Annual house price growth accelerated further in
December, reaching a six year high of 7.3%, up from 6.5% in the previous month. Prices rose by 0.8% month-on-month, after taking account of seasonal effects, following a 0.9% rise in November. House prices ended the year 5.3% above the level prevailing in March, when the pandemic struck the UK.”

The Bank of England was cheerleading for this sort of thing in its release earlier.

The mortgage market strengthened in November. Households borrowed an additional £5.7 billion secured on their homes, following net borrowing of £4.5 billion in October. November borrowing was the highest since March 2016, and significantly higher than the average of £3.9 billion seen in the six months to February 2020.

But for it the party really got started here.

The continued strength in mortgage borrowing follows a large number of approvals for house purchase over recent months. In November, the number of these approvals – an indicator for future lending – continued increasing, to 105,000 from 98,300 in October (Chart 1). This was the highest number of approvals since August 2007 and recent strength in approvals has almost fully offset the significant weakness earlier in the year. There were 715,300 house purchase approvals up to November 2020, close to the number during the same period in 2019 (722,000).

So we now know something we had long expected which is that even an economic depression is not allowed to get in the way of house price pumping and rises. Or as the Nationwide put it.

“But, since then, housing demand has been buoyed by a raft
of policy measures and changing preferences in the wake of
the pandemic.”

Consumer Credit

By contrast there will have been wailing and gnashing of teeth at the Bank of England earlier over this.

Household’s consumer credit weakened further in November with net repayments of £1.5 billion; that followed a net repayment of £0.7 billion in October. The weakening on the month reflected a fall in new borrowing. Since the beginning of March, households have repaid £17.3 billion of consumer credit. That has caused the annual growth rate to fall to -6.7% in November, a new series low since it began in 1994.

The word repayment is like kryptonite to them. These are broad brush numbers with the only breakdown we receive below.

Within consumer credit, the weakness was broad based with net repayments on both credit cards (£0.9 billion) and other forms of consumer credit (£0.7 billion). As a result, the annual growth rates of both components fell further, to -14.5% and -3.0%, respectively. For credit cards, this represents a new series low.

I make the point because there was a brief spell we were updated on car loans but that soon ended. So I wonder what is happening now in that area? According to the UK Finance and Leasing Association or FLA then personal credit for new cars was down 17% in the year to October and down 10% for second-hand cars.

But the overall picture is of a collapse in credit card borrowing which maybe has led to this.

The cost of credit card borrowing fell by 47 basis points to 17.49% in November; a new series low.

I have followed it since the credit crunch began and all the various interest-rate cuts have until now bypassed it.

Mortgage Rates are rising

Apart from it we see that other interest-rates are rising.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 5 basis points to 1.83% in November. That is close to the rate at the start of the year (1.85% in January)

Where did the Bank Rate cuts and bank subsidies ( Term Funding Scheme) go? It looks as though banks have simply boosted their margins. Especially as they pay ever less.

The effective interest rate paid on individuals’ new time deposits with banks fell by 3 basis points in November, to 0.50%, and remains much lower than in February (1.04%)………The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in February.

 

Comment

We see that in spite of the increasingly desperate effort to claim there is no inflation we do not have to look far to see it. Indeed this morning someone I consider to be something of a High Priest in the systemic denial has changed tack.

Ultra low interest rates raise asset prices hurting the young and those without wealth. ( Paul Johnson of the Institute for Fiscal Studies)

Why do I say denial? Well his 2015 Inflation Review told us this.

CPIH is conceptually the best overall measure of inflation in the UK.

Because it excluded the asset prices (house prices) he is now worried about. Indeed he thought making the numbers up was much better.

A home provides a flow of accommodation services that are
consumed by households. The rental equivalence approach estimates the price of consuming these services as being equivalent to what the owner would have to pay if renting the property.

Suddenly the house price rises are recorded as growth. The poor first-time buyer gets shafted twice. Firstly by higher prices and then by being told they are better off using the inflation measure recommended by Paul.

Next comes the instability created by a system built in sand and misrepresentations. Bitcoin is showing that by its drop to around US $30k as I have been typing this.

Lastly let me give you another example of reality being adjusted to suit a narrative. Remember the way that the present Bank of England Governor Andrew Bailey so botched an enquiry into overdraft interest-rates that they then doubled?

 Following discussions with reporters on how to account for the ending of fees and COVID support measures, these overdraft rates are now estimated to have been lower between April and September than previously thought, and similar since October.

So far though they seem to be failing.

The effective rate on interest-charging overdrafts was 20.62% in November, above the rate of 10.32% in March 2020 before new rules ending overdraft fees came into effect.

 

 

 

 

 

UK interest-rates are rising in spite of another money supply surge

Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).

London’s average house prices hit a record high of £496,000 in September 2020.

These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.

As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.

“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”

You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).

Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.

If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.

Pump It Up!

This is the change seen in October.

Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.

The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.

There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.

This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.

Mortgages

Let me now switch to the part that will be emphasised at the Bank of England morning meeting.

The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.

Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.

The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.

However the road to the fast track promotion scheme will mean relegating this part to the small print.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,

Perhaps our junior could emphasise this part.

 but remain below the rate at the start of the year (1.85% in January).

Consumer Credit

This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.

Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.

A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.

Small Business Lending

For once these numbers look good.

Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .

Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.

Comment

The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.

Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.

Also there is this.

 Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.

So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.

The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Podcast

The Bank of England has pumped up the housing market again

Overnight there has been quite a shift in economic sentiment. To some extent I am referring to the falls in equity markets although the real issue is the new lockdown in France and increased restrictions in Germany. As we have been noting they were obviously on their way and the Euro area now looks set to see its economy contract again this quarter. It will be interesting to see how and if the ECB responds to this in today’s meeting and these feeds also into the Bank of England. The UK has tightened restrictions especially in Northern Ireland and Wales as we now wonder what more the central banks can do in response to this?

Still even in this economic storm there is something to make a central banker smile.

LONDON (Reuters) – Lloyds Banking Group LLOY.L posted forecast-beating third quarter profit on Thursday, lowering its provisions for expected bad loans due to the pandemic and cashing in on a boom in demand for mortgages.

Britain’s biggest domestic lender reported pre-tax profits of 1 billion pounds for the July-September period, compared to the 588 million pounds average of analysts’ forecasts.

Few things cheer a central banker more than an improvement in prospects for The Precious! But we can see that there is also for them a cherry on top of the icing.

The bank booked new mortgage lending of 3.5 billion pounds over the quarter, after receiving the biggest surge in quarterly applications since 2008.

That links into the theme of monetary easing which of course is claimed to help businesses but if you believe the official protestations somehow inexplicably ends up in the housing market every time. So let us look at the latest monetary data which has just been released. Oh and one point before I move on, what use are analysts who keep getting things so wrong?

Mortgages

Whoever was responsible for the Bank of England morning meeting today must have run there with a smile on their face and gone through the whole release word by word.

The mortgage market strengthened a little further in September. On net, households borrowed an additional £4.8 billion secured on their homes, following borrowing of £3.0 billion in August. This pickup in borrowing follows high levels of mortgage approvals for house purchase seen over recent months. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered reaching levels slightly higher than the average of £4.0 billion in the six months to February 2020. The increase on the month reflected higher gross borrowing of £20.5 billion, although this remains below the February level of £23.4 billion.

From their perspective they will see this as a direct response to the interest-rate cuts and QE they have undertaken as net mortgage borrowing has gone from £0.2 billion in April to £4.8 billion. Something they can achieve.

The outlook,from their perspective, looks bright as well.

The number of mortgage approvals for house purchase continued increasing sharply in September, to 91,500 from 85,500 in August (Chart 1). This was the highest number of approvals since September 2007, and is 24% higher than approvals in February 2020. Approvals in September were around 10 times higher than the trough of 9,300 approvals in May.

At this point we have what in central banking terms is quite an apparent triumph as they have lit the blue touch paper for the housing market. It has not only been them as there have also been Stamp Duty reductions but we see that there is an area of the economy that monetary policy can affect.

As to what people are paying? Here are the numbers.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn, and the outstanding stock of, mortgages were little changed in September. New mortgage rates were 1.74%, an increase of 2 basis points on the month, while the interest rate on the stock of mortgage loans fell 1 basis point to 2.13% in September.

Money Supply

Curiously the Money and Credit release does not tell us the money supply numbers these days although we do get this.

Overall, private sector companies and households increased their holdings of money in September. Sterling money (known as M4ex) increased by £10.8 billion in September; a significant rise from August which saw withdrawals of £1.0 billion (Chart 5). This is a continuation of the trend of strong deposit flows seen between March and July, albeit at a much weaker pace in comparison to the £40.5 billion monthly average seen during that period.

In essence this is part of the higher savings we have observed where people have furlough payments to keep incomes going but opportunities to spend them have been cut.

I have looked them up and annual M4 (broad money) growth was 11.6% in September. So we are seeing a push of the order of 12% which is more than in the Euro area.

Consumer Credit

Here the going has got a lot tougher and the monetary push seems to be fading already.

Household’s consumer credit weakened in September with net repayments of £0.6 billion, following some additional net borrowing in July (£1.1 billion) and August (£0.3 billion).

Actually the numbers have established something of an even declining trend since July. This means that the detail looks really rather grim.

Although the repayment in September was small in comparison to the £3.9 billion monthly average seen between March and June, this contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows pushed the annual growth rate down further in September to -4.6%, a new series low since it began in 1994.

In fact it is essentially repayment of credit card debt.

The net repayment of consumer credit was driven by a net repayment on credit cards of £0.6 billion

So it has an annual growth rate of -11.3% now. That is probably due to the price of it which is something of a binary situation.For those unaware there have been quite a few 0% offers in the UK for some time now but this is also true for others.

The cost of credit card borrowing was also broadly unchanged at 17.92% in September.

Although blaming the interest-rate for credit card borrowing does have the problem that overdraft interest-rates have been on quite a tear.

The effective rates – the actual interest rate paid – on interest-charging overdrafts continued to rise in September, by 3.52 percentage points to 22.52%. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.

Perhaps those that can have switched to the much cheaper personal loans.

Rates on new personal loans to individuals were little changed in September, at 4.78%, compared to an interest rate of around 7% in early 2020.

As you can see Bank of England policy has been effective in reducing the price of those.

Comment

The present situation gives us an insight into the limits of monetary policy and as to whether we are “maxxed out”. We see that the Bank of England interest-rate cuts, QE bond purchases (another £4.4 billion this week) and credit easing can influence the housing market and personal loans. However we have also noted the way that more risky borrowers are now wondering where all the interest-rate cuts went? For example a 2 year fixed rate with a 5% deposit was 2.74% in July as the Bank of England pushed rates lower but was 3.95% in September, or a fair bit higher than before the easing ( it was typically around 3%).

So we see that monetary policy is colliding with these times even before we get out into the real economy and a reason for this can be see on this morning’s release from Lloyds Bank. Some £62.7 billion of mortgages went into payment holidays of which £9.1 billion have been further extended and £2.2 billion have missed payments. No doubt the banks fear more of this and this is why they are tightening credit for riskier borrowers which operates in the opposite direction to Bank of England policy.

So the easing gets muted and we are left mostly with the easing of credit for the government as the instrument of policy right  now.

 

 

 

 

Are UK house prices rising again?

Today we get to look at the money supply and credit situation in the UK  But before we get there yesterday brought news to warm a central banker’s heart. From Zoopla.

The annual rate of growth edged up to 2.7% in June, after rising 0.2% on the month. Price growth is highly localised, but there is little evidence of material declines at regional or city levels, although a small proportion of local areas are seeing price declines of up to -0.2%.

If the Bank of England had any bells they would be ringing right now with Governor Bailey stroking a cat whilst smiling. As to why? We are told this.

Buyer demand has risen strongly since housing markets reopened, as shown on the purple bar in the chart below. Although the number of new homes being listed for sale has also risen, it hasn’t increased by the same margin. This creates an imbalance of low supply and high demand – and contributes to house price growth.

So simply more buyers than sellers then. To be specific the purple bar in their chart shows a 25.3% imbalance.

This imbalance is most stark in cities in the North of England, including Manchester, Liverpool and Sheffield, and it is notable that these are in the top six cities for levels of annual house price growth.

I note a mention of Gloucestershire seeing a mini boom. The 20 cities sampled show the nearest ( Bristol) being one of the weaker areas albeit having more demand than 2019 unlike Belfast and Edinburgh. Interestingly London looks quite strong and is fifth on the list. Another house price rally in London would be a turn up for the books and here is Zoopla’s explanation.

The biggest change in the market spurred by the Chancellor’s announcement of a stamp duty holiday for England and Northern Ireland has been seen in London. Sales jumped by 27% in the weeks after the change. Given the higher average house prices in London and the South East, these are where the largest benefits from the stamp duty holiday will be felt. The stamp duty holiday will continue to support demand in these higher value markets.

Have they managed to bail it out again? Well it would appear that they intend to keep trying. From the Financial Reporter.

The Government is reportedly drawing up plans to extend the Help to Buy scheme due to Covid-19 delays.

According to the FT, ministers have been asked to extend the Scheme beyond its planned December deadline to support buyers whose purchases have been delayed by the pandemic.

The scheme is due to end in April 2021 and a new version of the scheme will run from April 2021 to March 2023, for first-time buyers only. If the original scheme ends when planned, sales transactions will need to be agreed by December 2020.

Help to Buy seems to be covered by The Eagles in Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

There is another route funded by the Bank of England and Nicola Duke or @NicTrades has kindly highlighted it.

I got my first mortgage in 1997 and the 2 yr fixed rate was 7.7% Today I got a fixed rate at 1.13% Amazing………..2yrs – the 5 yr is 1.3 and 10yr 1.44

As the band Middle of the Road put it.

Ooh wee chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

Mortgages

This morning’s Bank of England release would also have cheered Governor Andrew Bailey.

On net, households borrowed an additional £1.9 billion secured on their homes. This was higher than the £1.3 billion in May but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected both more new borrowing by households, and lower repayments. Gross new borrowing was £15.8 billion in June, below the pre-Covid February level of £23.4 billion.

Since the introduction of the Funding for Lending Scheme in the summer of 2012 they have been targeting net mortgage lending in my opinion. This time around they have kept is positive and as you can see it appears to be rising again. It is much less than earlier this year but after the credit crunch we saw negative net lending for some time. Even when the FLS was introduce it took until 2013 for there to be a return to positive net mortgage lending.

Approvals still look weak.

The number of mortgages approved also increased in June. The number of mortgage approvals for house purchase increased strongly, to 40,000, up from 9,300 in May. Nevertheless, approvals were 46% below the February level of 73,700 (Chart 3). Approvals for remortgage (which capture remortgaging with a different lender) have also increased, to 36,900; but they remain 30% lower than in February.

At these levels remortgage if you can is my suggestion, although not advice as that has a specific meaning in law.

Consumer Credit

The Governor will be chipper about these numbers as well and presenting them at the monthly morning meeting will not have been potentially career ending unlike the last few.

Household’s consumer credit borrowing recovered a little in June, following three particularly weak months (Chart 2). But it remains significantly weaker than pre-Covid. On net, people repaid £86 million of consumer credit in June following repayments totalling £15.6 billion over the previous three months. The small net repayment contrasts with an average of £1.1 billion of additional borrowing per month in the 18 months to February 2020. The weakness in consumer credit net flows in recent months meant that the annual growth rate was -3.6%, the weakest since the series began in 1994.

We have discovered ( via large revisions) that these numbers are not accurate to £86 million so substantial repayments have been replaced by flatlining and the junior at the meeting would do well to emphasise this.

The smaller net repayment compared to May reflected an increase in gross borrowing. Gross borrowing was £17.7 billion, up from £13.6 billion in May, but this was still below the average £25.5 billion a month in the six months to February 2020. Repayments on consumer borrowing were broadly stable in June, at £18.1 billion, below their pre-Covid February level of £24.6 billion.

So gross borrowing is picking up.

As a point of note it is the credit card sector which really felt the squeeze.

Within total consumer credit, on net there was a further small repayment of credit card debt (£248 million) and a small amount of additional other borrowing (£162 million). The annual growth rate for both credit cards and other borrowing fell back a little further, to -11.6% and 0.2% respectively.

Maybe it is because in a world of official ZIRP (a Bank Rate of 0.1%) the reality is this.

The cost of credit card borrowing fell from 18.36% in May to 17.94% in June, also the lowest rate since the series began in 2016.

By the way if we switch to the quoted series the overdraft rate is 31,53%. Mentioning that at the Bank of England will be career ending as it was an enquiry at the FCA ( boss one Andrew Bailey) that was so poor it drove them higher as opposed to lower.

Comment

Can the UK housing market leap Lazarus style from its grave one more time? Well the UK establishment are doing everything that they can to prop it up. Meanwhile the business lending that the policies are supposed to boost is doing this.

Overall, PNFCs borrowed an additional £0.4 billion of loans in June. Strong borrowing by small and medium sized businesses (SMEs) was offset by repayment by large businesses.

The borrowing by smaller businesses would ordinarily be really good except we know a lot of it will be out of desperation and of course as the bit I have highlighted shows is nothing to do with the Bank of England.

Small and medium sized businesses continued borrowing a significant amount from banks. In June, they drew down an extra £10.2 billion in loans, on net, as gross borrowing remained strong. This was weaker than in May (£18.0 billion), but very strong compared to the past. Before May, the largest amount of net borrowing by SMEs was £0.6 billion, in September 2016. The strong flow in June meant that the annual growth rate rose further, to 17.4%, the strongest on record (Chart 5). This strength is likely to reflect businesses drawing down loans arranged through government-supported schemes such as the Bounce Back Loan Scheme.

This bit is really curious.

Large non-financial businesses, in contrast, repaid a significant amount of loans in June. The net repayment, of £16.7 billion, was the largest since the series began in 2011 and followed a net repayment of £13.0 billion in May.

So we see a complex picture in an economy which is now awash with cash. If we switch to the money supply then it ( M4 or Broad Money) has risen by 11.9% over the past year. Of this around £174 billion has come in the last four months.

Me on The Investing Channel

UK Money Supply surges as Unsecured Credit Collapses

Today brings the UK monetary situation into focus and to say it is fast moving is an understatement. Let me illustrate in terms of QE or Quantitative Easing where the current rate of purchases is £13.5 billion a week and the total by my maths is now £507 billion. This means we have seen an extra £72 billion in this Covid-19 pandemic phase. Looking at it from a money supply point of view means that in theory an extra £72 billion has been added. We have seen before that in practice QE does not always flow into the money supply data as the theory tells us but I also note that the ECB figures we looked at earlier this week were responding to its QE actions.

Next comes the other programmes where again the heat is on. The Covid Corporate Financing Facility has bought some £15.9 billion of Commercial Paper and in return supplied liquidity. Next comes the Corporate Bond programme which has bought around £2 billion so far. They do not provide much detail on the Corporate Bond purchases to avoid me pointing out that for example they are buying Apple and Maersk. Last on the list is the new version of the Term Funding Scheme supplying liquidity to banks at 0.1% and it claims to have supported £8.2 billion of new loans.

So we awash with liquidity if not actual cash. Now let us look at the impact until the end of March as we look at this morning’s data.

Money Supply

I think we can say we see an impact here! The emphasis is mine.

The amount of money deposited with, and borrowed from, banks and building societies by private sector companies and households overall rose very strongly in March. Sterling money holdings by households, non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs), known as M4ex, rose by £57.4 billion in March, a series high and far above its previous six-month average of £9.0 billion. Sterling borrowing from banks (M4Lex) rose by £55.3 billion, also a series high and up from its previous six-month average of £5.1 billion.

Or as DJ Jazzy Jeff and the Fresh Prince would say.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Tic-tic-tic-tic Boom!
Well yo are why’all ready for me yet
(pump it up prince)

Or more prosaically,

The strength in money was broad based across sectors, with the largest increases since these series began for households (first published in 1963), PNFCs (1963) and NIOFCs (1998). (  non-financial businesses (PNFCs) and non-intermediating financial companies (NIOFCs))

If we switch to the money supply implications then the 2.4% rise in March was as much as not so long ago we were seeing in a year. The annual growth rate of 7.4% is the highest we have seen for some time and next month we will break the numbers posted by the Sledgehammer QE effect in the autumn of 2016 and the spring of 2017. Actually I think we will break the all-time record for M4 anyway ( yes for my sins I still recall the £M3 days) but that is for another day.

Consumer Credit

There are some numbers here which in the previous regime would be too much for the morning espresso of Governor Carney and would have him summoning a flunkey from the Bank of England bar to fetch him his favourite Martini as he would be both shaken and stirred,

The weak net flows of consumer credit meant that the annual growth rate fell to 3.7% in March, lowest since June 2013. Within this, the annual growth rate of credit card lending fell to -0.3%, the first negative annual growth since the series began. The annual growth rate of other loans and advances fell to 5.6%.

The first Governor of the Bank of England to preside over negative annual credit card growth. I guess he and the new Governor Andrew Bailey will be playing a game of pass the parcel with that one!

This is a similar effect to what we saw in the credit crunch with households battening down the hatches by repaying credit with this time around settling your credit card in the van.

Households repaid £3.8 billion of consumer credit, on net, in March, the largest net repayment since the series began . Within this, credit cards accounted for £2.4 billion of net repayments and other loans and advances accounted for £1.5 billion.

Indeed the net figures may not do the gross data full justice.

This very weak net lending reflected a larger fall in new borrowing that was partially offset by slightly lower repayments. Gross lending was £5.4 billion weaker than February, while repayments were £1.3 billion lower.

Business Lending

This is something of a bugbear of mine as back in the summer of 2012 we were promised the the Funding for Lending Scheme would boost it, especially for smaller businesses. How is that going?

Within this, the growth rate of borrowing by large businesses increased sharply, to 11.8%, and growth by SMEs rose to 1.2%, from 0.9% in February.

Looking at the numbers for smaller businesses we are seeing two failures here. First the initial failure to get cash to them and second the conceptual failure over the past 8 years as the schemes to help them have recorded very little growth at best and sometimes none at all. In fact the situation has been so bad that the word counterfactual has been deployed which has two effects. For those that do not understand what it means it sounds impressive whilst leaving those that do mulling how giving £107 billion to the banks in the TFS had so little effect. Almost as if it was designed to do that.

Of course it is much easier to lend to larger businesses.

UK businesses’ deposits rose by £34.0 billion in March. Changes in deposits and loans were closely correlated across industries.

That bit is awkward. Did those that got it, not need it?

Mortgages

We open with a bit of all our yesterdays.

Mortgage borrowing picked up a little in March, with a net increase of £4.8 billion. The annual growth rate also rose a little, to 3.6%. Mortgage borrowing tends to lag approvals, however, so this strength is likely to reflect strength in approvals in previous months.

Then we get a bit more with the current reality.

In the mortgage market, evidence of a decline in housing market activity started to become apparent in March mortgage approval statistics, which fell by just over 20% (Chart 4). This was a broad based fall across reasons for applying for a mortgage. Approvals for house purchase fell by 24% to 56,200, their lowest level since March 2013; and approvals for remortgage fell 20% to 42,600, the fewest since August 2016. ‘Other’ approvals, which includes for withdrawing equity, fell back 17%, to 12,000.

Looking ahead with Gilt yields here we are likely to see more people look at a remortgage as my indicator for fixed-rate mortgage trends the five-year Gilt yield is a mere 0.1%. Of course there is also the issue of the market essentially being frozen.

Comment

Let me remind you that the broad money numbers are supposed to be a predictor of nominal GDP growth ( economic output) around two years ahead. So if we say we will be lucky to be back to where we were at the start of 2020 in two years time we would expect inflation of the order of 7% or so. Care is needed because the impulse these days is often seen in asset markets and is in my opinion a driver behind the stock market rally we have seen. That factor is why I argue to put house prices in consumer inflation measures in spite of the fact that for them “down, down” by Status Quo is more likely than Yazz’s “The only way is up” for this year. Although some seem to have spotted an alternative universe.

Nationwide said on Friday its measure of house prices rose by 0.7% in April from March and was 3.7% higher than a year earlier, stronger than forecasts in a Reuters poll of economists in both cases. ( Reuters)

Really?

Now let me look at another alternative universe or if this was a Riddick film the Underverse. You may need reminding that the official Bank of England Bank Rate is 0.1% as you read the numbers below.

Effective rates on interest bearing credit cards fell 14 basis points to 18.4%, whilst effective rates on personal loans fell 7 basis points to 6.8%.

Also the debacle at the Financial Conduct Authority which saw many overdraft rates double to around 40% is slowly being picked up in the data. Someone at the Bank of England must be torturing the series to keep the rate as low as 24% and please Governor Bailey who of course presided over the FCA at the time.