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




How much will the central banks lose on their QE bond holdings?

As we start a new financial week the calendar sees the Bank of England restart its plan to reduce its large UK bond or Gilt holdings. But before we get to that the Swiss National Bank came racing out of the traps this morning with this.

According to provisional calculations, the Swiss National Bank will report a loss in the order of CHF 132 billion for the 2022 financial year. The loss on foreign currency positions amounted to around CHF 131 billion and the loss on Swiss franc positions was around CHF 1 billion. A valuation gain of CHF 0.4 billion was recorded on gold holdings.

There is an obvious issue here with the concept of a central bank as a hedge fund. Also the SNB has been raising interest-rates in 2022 from -0.75% which is a little awkward when you have built up an enormous store of cash abroad. The main loser here I would imagine is all the bond holdings ( mostly in Europe) as bond holding values decline as interest-rate rises have seen bond yields rise. The investements are usually in short-dated bonds but they have been hit hard in the last year or so.

There is a real world consequence from this because the era of central bank’s bestriding the world like masters of the universe has led to them being able to send money to their national treasuries.

After taking into account the distribution reserve of CHF 102.5 billion, the net loss will be around CHF 39
billion. Pursuant to the provisions of the National Bank Act and the profit distribution agreement between the Federal Department of Finance and the SNB, this net loss precludes a distribution for the 2022 financial year.

So no money for the Swiss treasury this rime around. I have regularly pointed out that the profits from the QE era were being financed via buying from the same bodies claiming the profits! Or if you prefer what could go wrong? Indeed many European markets had central banks ( ECB & SNB) competing to buy at times which us why we saw negative bond yields even in Italy.

Bank of Japan

If we now switch to the other Currency Twin as we used to call them we see a domestic issue in play and it comes from this announcement.

The Bank of Japan shocked markets in December by widening the band in which 10-year government bonds could trade from 25 to 50 basis points. Investors responded by pushing two- to 10-year yields to their highest since 2015,  ( Financial Times )

That is again rather awkward when you own so many bonds or JGBs. It owns more than half the market or if you prefer the end of year accounts show this, 564,155,789,895,000 Yen’s worth. Actually in typically Japanese fashion this apparently QE retreat has come with more of it.

The Bank of Japan just set a new monthly record for bond purchases. They bought more than $128 Billion in Japanese government bonds this month. ( @stackhodler )

There was more emergency bond buying last week as the Bank of Japan continued to apply a policy of Face. After announcing a move to a bond yield of 0.5% they have tried to stop it and with today’s range being from 0.5% to 0.51% they are having more than a little trouble.

But for our main purpose today there is the issue that the Bank of Japan is taking losses on what is an enormous portfolio. The March JGB future was over 151 in the last year whereas it is 146 now. So when we look at the size of the Bank of Japan position mark to market losses are already large and the only body stopping them getting larger is the buying of The Tokyo Whale itself. Which of course leaves it with an ever riskier position.


The European Central Bank is next on my list because it too pushed bond yields negative and so gave us peaks in prices. At this point it is hard not to think of all those Italian bonds it bought at negative yields but also even Germany saw quite a bubble as we mull the Swiss buying too. One way of looking at this is the Italian bond future which went above 154 and is 112.5 as I type this so the PEPP purchases look simply awful on a mark to market basis. You do not need to take my word for it as here is the ECB blog from last week.

Government borrowing rates have increased sharply on the back of high inflation and the normalisation of monetary policy.

It is both in the other side of that trade and via a combination of open mouth operations and higher interest-rates is enforcing it.

It is pretty much obvious that, on the basis of the data that we have at the moment, significant rise at a steady pace means that we should expect to raise interest rates at a 50-basis-point pace for a period of time. ( ECB President Lagarde)

Those who have followed me since the beginning may recall that the claims from the ECB that it could not lose money as long as Euro area bonds were repaid. The problem this time around is that it paid more than 100 for them sometimes much more and will only get 100 back. Whilst it can turn a blind eye to mark to market losses bonds will mature and it plans to do this.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

Next up is the issue of the ECB being backed by so many different national treasuries ( 20 now with Croatia). Profits and losses are usually 18% for the collective numbers and 82% for the national central bank. So eyes will sooner or later be on Italy again.

Doe the moment the flow of money from Euro area central banks to their national treasuries is over.

The Federal Reserve

Last July the Fed told us this.

The need for the Fed to increase the policy rate expeditiously to address inflationary pressures is projected to result in the Fed’s net income turning negative temporarily.

Ah “temporarily” we know what that means! But there was more.

The associated increase in market interest rates has also led to an unrealized loss position of the SOMA portfolio, which could become larger in the near-term

It has. Anyway back then they argued this.

As a result, remittances are suspended for three years in the baseline and a deferred asset is recorded on the Fed’s balance sheet, While the deferred asset reaches a peak of about $60 billion in the baseline projection, the tail risk in these projections, represented by the upper edge of the dark-blue area, indicates that the deferred asset could reach as high as about $180 billion.

Deferred assets are the new euphemism for losses by the way.

For the US taxpayer the issue is that the flow of money from the Fed is over.

The Fed transferred back $109 billion for 2021, the central bank said in March. That was well over the $86.9 billion in so-called remittances handed back in 2020. ( Reuters )

At the moment the account at the Fed is – US $20.5 billion.


The biggest irony of the present situation is that central banks have enforced losses on themselves. The cost of QE is their own short-term interest-rate which they have raised quite a bit in 2022 and likely will do more in 2023. Even worse in their orgy of bond buying after the Covid pandemic they paid such high prices for bonds that there is little yield in return. So the cash flow situation is awful.

Next up is the issue of the capital situation which is even worse. If you pay 130 for a bond which matures at 100 there will eventually be a problem. But active QT or bond sales means you have to take some form of loss as you are selling for less than you paid and for the reasons explained above there is little income to cover this. Ditto for bond maturities.

Why did they not plan ahead? Well I did because if we go back to September 2013 I wrote a piece in City-AM suggesting the Bank of England take advantage of a better economic period to shrink its holding and thus potential for losses. Instead Governors Carney and Bailey did more not less.

So now they emerge blinking in the sunlight singing along with Sweet.

Does anyone know the way, did we hear someone say(We just haven’t got a clue what to do)Does anyone know the way, there’s got to be a wayTo blockbuster

This is not the end of the financial world because central banks can always print more money. But as the money printing fed the inflation we are now experiencing it would be logically inconsistent to print more right now.





Borrowing for the energy crisis has become much more expensive for Euro area governments

If we look across the English Channel or perhaps La Manche there is a lot going on. Last week we saw a shift in interest-rate policy which has been backed up this morning. This is from Vice Presidebt de Guindos in Le Monde.

First, increases of 50 basis points may become the new norm in the near term. Second, we should expect to raise interest rates at this pace for a period of time. And third, our interest rates will then enter into restrictive territory. The steps we have taken so far are going to have an impact on inflation, but we still need to do more.

As you can see this is a continuation of the rhetoric which suggests the Deposit Rate will rise from the present 2% to 3% over the next couple of meetings, and led some to think it could go as high as 4%.

Today I want to look at a consequence he himself mentions.

Admittedly, raising interest rates means an increase in funding costs for governments.

It is a little tucked away in his interview probably because there was another big shift announced last Thursday. But let us now look at that colliding with the problems created by the energy crisis.

Borrowing for energy needs

Bloomberg has taken a look at what the energy crisis has cost so far and the numbers are not pretty.

Europe got hit by roughly $1 trillion from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started.

The International Monetary Fund has looked at it another way.

European governments have up to now used a wide range of policies to lessen the effects of high energy prices, including various forms of price suppression. In some countries the fiscal cost of the energy crisis response is set to exceed 1.5 percent of GDP in the first year alone—with more than half of that in costly non-targeted measures

In the IMF piece I note something which is rather familiar from the inflation issue.

Most measures were meant to be temporary, but they have already been extended, expanded, or both in many places.

That does of course fit with the definition of temporary in my financial lexicon for these times.

Actually European government’s have spent this so far.

Europe’s massive tab for securing energy supplies and cushioning consumers from price spikes soared past €700 billion by end-November

This includes the UK which does not count for Euro borrowing purposes but 600 billion Euros is still a lot and there is more to come according to Bloomberg.

After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices.

So high levels of borrowing could be with us for a while. This would only be added to by this reported by Politico last month.

The EU is in emergency mode and is readying a big subsidy push to prevent European industry from being wiped out by American rivals, two senior EU officials told POLITICO…….The European Commission and countries including France and Germany have realized they need to act quickly if they want to prevent the Continent from turning into an industrial wasteland. According to the two senior officials, the EU is now working on an emergency scheme to funnel money into key high-tech industries.

We something familiar in this as we see perhaps another SPV or Special Purpose Vehicle being set up for it.

The tentative solution now being prepared in Brussels is to counter the U.S. subsidies with an EU fund of its own, the two senior officials said. This would be a “European Sovereignty Fund,”

So countries can simultaneously borrow and claim they are not doing so. Actually Eurostat has done a pretty good job over time of pegging them back. But in the year it may take it to do it politician’s attention has usually moved on.

Let us move on with Europe preferring the IMF version above as it has lower numbers although in another piece they too mention 1 trillion Euros as a worst case scenario. But before I do let me point out that Bloomberg have been cheerleading for a green revolution which has morphed into quite a crisis.

ECB Policy

Previously the ECB would have hoovered up the bond issuance implied by the changes above. After all it is the only central bank I can think of that ran two QE bond buying plans at once as it added the PEPP to its existing one. That is the road which saw its balance sheet head for 9 trillion Euros. This has led to an interesting comparison from Robin Brooks.

Relative to the outstanding issuance, the ECB is as big a holder of government debt as the BoJ…

As of the third quarter they had bought some 40% of bond issuance. But as David Bowie would put it we are about to see some ch-ch-changes.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

This is the beginning of Quantitative Tightening or if you prefer reverse QE for the Euro area. It is not going to be actively selling bonds like the US Federal Reserve or the Bank of England. But it will no longer be oiling the wheels of bond issuance by reinvesting maturities. So others will have to find an extra 15 billion Euros a month to replace it. They will still be oiling the bond issuance wheels just less so.

It represents roughly half the redemptions over that period of time.  ( President Lagarde )

All this is happening whilst the economy is weak. Back to Vice-President de Guindos.

The indication for the fourth quarter of 2022 is that we are perhaps in negative territory, but not very deep, with GDP expected to contract by 0.2%. The lead indicators we have are not good. Our projections therefore expect the euro area to fall into a mild recession in the last quarter of this year and in the first quarter of 2023, when GDP is expected to contract by 0.1%.


There is something of a perfect storm on the way for government borrowing costs.

  1. The energy crisis means they will be borrowing more and probably a lot more.
  2. The economy is likely in a recession which does not help
  3. The major bond buyer in recent years which is the ECB is planning to reduce its purchases to a relative dribble.
  4. The ECB plans to push short-term interest-rates above 3% and maybe towards 4%

It is not my purpose to say bond yields will go higher. Well apart from shorter term ones as Germany will not have a two-year yield of 2.5% should the Deposit Rate go above 3%. But to point out this change which has already taken place. Over the pandemic borrowing period Italy was able to borrow for ten-years at a cost of less than 1% and ay times for around 0.5%. As I type this it is 4.4%

Such a move happens in slow motion as countries issue new bonds and refinance existing ones. But it is also happening with a quicker move as inflation linked bonds have been very expensive in 2022.

The Bank of Japan cracks meaning the Widowmaker springs to life

This morning has brought some pretty significant economic news out of Nihon or Japan. It started in an area I mentioned in a reply to yesterday’s comments because bond yields had pushed higher making me suspicious. Overnight if we stay with that theme we saw this.


That takes me back to my days out in Tokyo, but in the modern era that did not happen because the Tokyo Whale otherwise known as the Bank of Japan was hoovering up ten-year Japanese Government Bonds at a yield of 0.25%. A bit like Gandalf in The Lord of the Rings when he cried “Thou shalt not pass!”

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative
financial conditions.

So we have a need to maintain what is called “face” in Japan so something significant is coming. Especially as we see that foreigners or “gaijin” are being blamed.

Since early spring this year, volatility in overseas financial and capital markets has increased and this has significantly affected these markets in Japan.

A rise in short-term interest-rates? No not that one.

The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate
Balances in current accounts held by financial institutions at the Bank.

Instead we find a move they have been forced to do once before. That is loosen the terms of Yield Curve Control. It came with a sort of denial

The long-term interest rate:
The Bank will purchase a necessary amount of JGBs without setting an upper limit
so that 10-year JGB yields will remain at around zero percent.

But then we got there.

While significantly increasing the amount of JGB purchases, the Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

So we get to it. They are shifting Yield Curve Control from 0.25% to 0.5% which they then confirm.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.

If we just for the moment stay in the bond market we see that the short Japanese Government Bond trade has turned in a profit as the March futures contract fell by 1.35 points. The yield has only moved to 0.4% so far because some will take profits and others may buy knowing they can sell to the Bank of Japan at 0.5% in the worst case. 

Also the Bank of Japan was in making sure the falls were not too large ( back to the issue of loss of face)


Japanese Yen 

We have been following this all year due to the significance of the moves which initially was a large depreciation. This morning, however.

 The Japanese yen strengthened by more than 3% against the U.S. dollar to 132.56, marking its strongest levels in over three months. ( CNBC )

There are quite a few consequences here of which the simplest is that some traders will have singed fingers as others wake up with a smile. Next the Japanese Ministry of Finance will be having a celebratory glass of sake as its currency intervention now looks really rather clever. Also the new stronger phase for the Yen will mean that Japan will be paying less for its large energy imports so there will be an improvement there.

For international players there is the issue of the Carry Trade. We have been observing this for more than a decade now. For newer readers one of the factors into the credit crunch was that people borrowed Japanese Yen as interest-rates were low and then panicked out as the credit crunch hit. Well this year Japan has been the last (wo)man standing on the issue of negative interest-rates. Technically it still is but you are now being hit on exchange rates and borrowing via bonds is now more expensive. 

Also the stereotypical Japanese investor Mrs. Watanabe faces the prospect of getting some interest on her money in Yen. This is a big deal when you consider how much Japanese money has gone abroad chasing yield.

The Tokyo Whale

There is another reason for the Bank of Japan to be supporting the JGB market today. Imagine prices falling when you have this position.

TOKYO — The share of Japanese government bonds held by the Bank of Japan has topped 50%, hitting a record high as the central bank has accelerated its government debt purchases to hold down long-term interest rates. ( Nikkei in June)

In fact things in some bonds could get pretty spectacular.

TOKYO, Nov 2 (Reuters) – The Bank of Japan’s ownership of newly issued 10-year Japanese government bonds (JGBs) exceeds the amount sold at auction,

Let me put it another way as it holds some 563,738,252,674,000 Yen of Japanese Government Bonds on which it is in the process of taking a bath. It has another 10.7 trillion of Corporate Bonds and the like on which it will also be taking a bath.

I stopped counting when Japan was on its nineteenth version of QE partly because they changed the name to QQE. But this must be about version 30 now in old money.


The Bank for International Settlements looked at this in a Working Paper earlier this year.

From the onset of the program in December 2010, the total amount of ETFs purchased by the BOJ has continued
to increase and reached about 35 trillion yen, or 5% of the total market value of all listed stocks in Japan. 

Actually it is now 36.9 trillion Yen and this is the real reason for The Tokyo Whale moniker. Plenty of other central banks have bought bonds ( although not on the same scale) but no-one else has ploughed into the equity market in such a manner.

Oh and returning to the BIS paper this is how they explain an equity put option.

In the ETF purchase program, the BOJ does not randomly purchase ETFs, but instead only purchases ETFs when the stock market faces negative price pressure.

So we see another set of holdings which have had a bad day.

The Nikkei 225 fell 2.46% to 26,568.03, leading losses in the region, and the Topix fell 1.54% to 1,905.59. ( CNBC )

It did not buy any this morning. Perhaps it was mulling its recent losses although the overall programme has a mark to market profit. The only catch is who do you sell sych a large position too?


We have seen two major central bank moves in the past few days. First the ECB and its promise of more 0.5% interest-rate hikes and now the Bank of Japan has creaked. We may see more from the Bank of Japan as you know what I think about official denials.


Let me remind you that he introduced negative interest-rates only a Beatles week ( 8 days) after denying any such intention. A Christmas present as the Japanese like to move when us Gaijin are on holiday? Probably not but…

This also shows another end to central bankers being “masters of the universe” as we see another one in retreat. What little was left of Modern Monetary Theory went too. Not the grand collapse of the Swiss National Bank in January 2015 but a significant move. The Bank of Japan will be seeing larger and larger losses on what are enormous positions.

Let me leave you with Governor Kuroda who loves to tease.

BoJ’s Kuroda: Won’t Hesitate To Ease Monetary Policy Further If Necessary



Winter has finally arrived for UK house prices

The UK is now heading into an economic zone that poses a real challenge for economy policy. The credit crunch era has seen an extraordinary effort to first get house prices rising and then maintain it. As time passes it is easy to forget that the Bank Rate cut to 0.5% and the initial waves of QE bond buying were not enough. So we added the Funding for Lending Scheme (yet another bank subsidy) and Help to Buy to the mix which turned net mortgage lending and house prices positive. More recently the pandemic era saw something of a turbocharger added to the house price engine with Bank Rate cut to 0.1%, a wave of QE bond buying and another bank subsidy via an enhanced Term Funding Scheme. So house prices surged again.

This morning has brought rather different news and let me first say that my heart goes out to the research student presenting the Bank of England morning meeting. It was simply awful luck that the rota meant that they had to inform Governor Andrew Bailey of this.

Average house prices fell in November as the rate of annual growth slowed further to +4.7% (from +8.2%), with
the typical UK property price now sitting at £285,579. The monthly drop of -2.3% is the largest seen since
October 2008 and the third consecutive fall. ( Halifax )

There is no way of sugaring such a monthly fall from the perspective of a central banker. As visions of being banned from using the afternoon cake trolley occur our research student should try pointing out that it would all be worse without the Governor’s masterful intervention in the UK bond market, which is yielding a tidy profit as sales begin.

But a fall in the annual rate of house price growth to 4.7% would have set a bad tone on its own and a 2.3% monthly drop will make the room feel like the windows are open on what is a cold wintry day. A little warmth may be created by reminding everyone of this.

“When thinking about the future for house prices, it is important to remember the context of the last few years,
when we witnessed some of the biggest house price increases the market has ever seen. Property prices are
up more than £12,000 compared to this time last year, and well above pre-pandemic levels (+£46,403 vs March

The problem with reminding everyone about the wealth effects is that in the words of Paul Simon they are now slip-sliding away. Plus the factors mentioned by the Halifax below suggest more falls are on their way.

The market may now be going through a process of normalisation. While some important factors like the limited supply of properties for sale will remain, the trajectory of mortgage rates, the robustness of household finances in the face of the rising cost of living, and how the economy – and more specifically the labour market –
performs will be key in determining house prices changes in 2023.

The Nationwide

Today’s Halifax release backs up what we were told by The Nationwide at the start of the month.

The fallout from the mini-Budget continued to impact the market, with November seeing a sharp slowdown in annual house price growth to 4.4%, from 7.2% in October. Prices fell by 1.4% month-on-month, after taking account of seasonal effects, the largest fall since June 2020.

The different measures are far from always the same but this time around they are more similar as the numbers above have been declining for 3 months now.

Economic Factors

Mortgage Costs

The situation here was summed up by a tweet from Henry Pryor.

Average 2yr fixed mortgage rate according  to @Moneyfacts_co.uk Last Dec – 2.34%
Oct – 6.65%

So things have improved but the overall situation has deteriorated over 2022. The recent problems were back up in the latest Bank of England Money and Credit release.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% in October. The rate on the outstanding stock of mortgages increased by 5 basis points, to 2.29%.

I am not sure how they get to a mortgage rate of 3.09% but we can stay with a rising trend and returning to Henry’s tweet I noticed that banks have widened margins. The UK two-year bond yield has declined by around 1.5% so more than twice the fall in mortgage rates seen so far.

According to Moneyfacts some better deals have emerged.

While first-time buyers with smaller deposits may continue to keep their plans on ice until conditions stabilise further, the options around and below the 5.00% mark are increasing if you’re looking to remortgage or move home.

But taking a look they require equity of at least 25% and also are for bigger mortgages as otherwise a product fee of £1499 makes the effective rate a fair bit higher.


We know that the economic situation is struggling but the metric for house prices is wages growth. At first that looks good.

Growth in average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.7% among employees in July to September 2022; this is the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic period. ( Office for National Statistics )

The problem is that once you try to go and buy anything you realise that prices have risen faster. Even the flawed UK real wages numbers have spotted that.

In July to September 2022 growth in total and regular pay fell in real terms (adjusted for inflation) by 2.6% on the year for total pay and by 2.7% on the year for regular pay; this is slightly smaller than the record fall in real regular pay we saw April to June 2022 (3.0%) but still remains among the largest falls in growth since comparable records began in 2001.

My estimate of real wages falls is more like 5% per annum. My estimate is based on two realities ignored by the official data. Any actual cost of owner-occupied housing involves a combination of a lump sum and/or mortgage costs which have risen, the latter by amounts we look at earlier. Secondly the official rental series used in the recommended CPIH inflation measure is a mess. The use of a “stock” concept means we get last years numbers ( somewhere in the summer of 2021) which is a big deal in a fast changing world. Next up is whether using a “stock” misses some rises? Even worse Imputed Rents are used for owner-occupiers so a measurement problem becomes three times larger.


The first point is that everything here points to lower house prices. The main driver is higher mortgage rates backed up by a weaker economy with lower real wages. We have not had a period like this for quite some time. Also in their efforts to avoid house price falls ( my view on the “temporary” and “transitory” claims about inflation were because they hoped they could avoid reducing house prices) now mean that the main squeeze is on just as the economy is at its weakest trajectory. A move that technocratic central banks were supposed to prevent.

From that comes my view that the central banks and in this case the Bank of England will weaken on interest-rates. We looked at Australia yesterday and saw how the RBA has dropped back to 0.25% increases ( 3 in a row now) and wonder when it will stop and then reverse course? The Bank of England is not as advanced as that  but after next week’s increase which I still expect to be 0.5% how many more will there be? So house price falls can be expected for the early part of 2023 but they will in themselves put pressure on central banks to reverse course on interest-rates.

The Bank of England gets ready to make a large profit on its bond dealing

This morning the research student responsible for the morning meeting at the Bank of England will arrive with a spring in their step. The publication informally known as the “house journal” but otherwise known as the Financial Times has this in it.

The question is what rate of inflation leads to salience. A hint is given in a recent paper, which looks at Google searches for “inflation” as a function of the actual inflation rate. It found that, for the US, if inflation was around 3-4 per cent, people simply did not pay attention. Above 3-4 per cent, they did.

Altogether, these arguments have led me to conclude that, while a higher inflation target is desirable, the right target for advanced economies such as the US might be closer to 3 per cent than our original 4 per cent proposal.

He or she will be able to point out to Governor Andrew Bailey that he had masterfully preempted such discussions in the UK by allowing inflation to reach 11.1% and that the UK is well equipped for such new ideas.  The piece suggests that they night not bother to change the target and just target 3% anyway.

I suspect that when, in 2023 or 2024, inflation is back down to 3 per cent, there will be an intense debate about whether it is worth getting it down to 2 per cent if it comes at the cost of a further substantial slowdown in activity. I would be surprised if central banks officially moved the target, but they might decide to stay higher than it for some time and maybe, eventually, revise it. We shall see.

With Bank Rate at 3% there may even be the suggestion that the Governor has been well ahead of events.

Mortgage Rates

The meeting may continue with a review of lower mortgage rates with this from Friday.

Leeds Building Society has brought out a number of new fixed rates, which include five- and 10-year offerings.

One highlight in the five-yea range is a 65% LTV fix at 4.94%. This comes with a free standard valuation and charges no completion fee. It is available for purchase and remortgage. ( Mortgage Strategy )

Plus this.

Clydesdale Bank has made changes to its residential and buy-to-let (BTL) mortgage range, effective today (25 November).

For new customers, the residential 75% and 80% loan-to-value (LTV) fixed rate fee savers have been re-launched starting from 5.42%.

The 75% to 90% LTV fixed rates have been reduced by up to 0.48% to start at 4.99%.

The lender has reduced selected BTL 60% to 75% LTV fixes by up to 0.41% to start at 5.39%.

These will give the opportunity to point out how wise the Governor was at his last press conference.

We can make no promises about future interest rates. But based on where we stand today, we think Bank Rate will have to go up by less than currently priced into financial markets. That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.

With UK short-dated bond yields at approximately 3.25% the presenter can add that even more examples of the Governor’s exceptional foresight on mortgage-rates can be expected as we move into December.

Profits from bond trading

The next bit is going to be very awkward for all those on social media who claimed that the Bank of England lost £65 billion in response to the Kwarteng mini-Budget. As of the weekend @ronlondoncom took up the state of play.

The not QE, Temporary QE, or “financial stability gilt purchases”, will be unwound from next week, in a rather interesting way. But first, as we know, they were bought for £19.3bn. As of last night’s close they are worth £24.8bn, giving a tidy profit of £5.5bn so far (I’m ignoring any coupons received in the interim, so it’ll actually be a bit higher).

I am pointing this out because the sales start this afternoon and as they have set a metric which is open to interpretation I am intrigued as to how they will play this.

The Bank intends to set minimum levels for the prices it is willing to accept, in support of its objective to unwind the portfolio in a timely but orderly manner.

Profits of more than a quarter would have many traders chomping at the bit.

Today’s Data

It would take a bit of chutzpah after the above but remember this is a central bank. So the Governor is also likely to be praised for finally bringing some sort of return for savers.

The effective interest rate paid on individuals’ new time deposits with banks and building societies rose to 3.26% in October, from 2.49% in September.

A research student worth their salt might even have looked back far enough to note that that words of Deputy Governor Charlie Bean from September 2010 were now in play.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

In the intervening 12 years Deputy Governor and now Sir Charles Bean has been “doing very well” as his RPI linked pension has been topped up by a review into UK economic statistics which went nowhere and a period at the Office for Budget Responsibility where he manfully continued the first rule of OBR Club ( that it is always wrong…). Whilst we are considering his future predictions this was quite a whopper.

The Deputy Governor said the Bank’s 0.5  per cent base rate was part of an “aggressive policy” to deal with a “once-in-a-century” financial crisis.

Mortgage Numbers

This will be shuffled down the list as no-one wants to present on weaker mortgage data. That is the sort of thing that can end your research status.

Net borrowing of mortgage debt by individuals decreased from £5.9 billion to £4.0 billion in October (Chart 1), the lowest level since November 2021 (£3.8 billion).

Even worse there was this.

Approvals for house purchases, an indicator of future borrowing, decreased to 59,000 in October, from 66,000 in September, and were below the previous 6-month average (also 66,000).

The rise in mortgage rates can of course be given a positive spin in the light of Bank of England actions to reduce them.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% in October. The rate on the outstanding stock of mortgages increased by 5 basis points, to 2.29%.

Consumer Credit

Higher interest-rates do look to be having an impact in this area.

Individuals borrowed an additional £0.8 billion in consumer credit in October, on net, following £0.6 billion of borrowing in September . This was below previous 6-month average of £1.3 billion.

How much did they rise?

The effective rate on new personal loans to individuals increased by 48 basis points to 7.23% in October, the highest level since December 2018 (7.45%). The effective rate on interest bearing credit cards increased to 19.31% in October from 18.96% in September. Conversely, the effective interest rate on interest-charging overdrafts in October slightly decreased, by 10 basis points, to 20.73%.

One point of note is that with fixed-rate mortgages above 6% back then it seems that the margin that you have to pay for a personal loan rather shrank.


I have covered a lot of ground today and let me start with the inflation targeting point. This is from the man who helped collapse the Greek economy as Olivier Blanchard was chief economist at the IMF back then and helped implement quite an economic disaster. Unlike those lower down the spectrum who would be sacked for such incompetence the establishment showers its own with titles in the same way a warship under fire uses a smokescreen.

The author is the C Fred Bergsten Senior Fellow at the Peterson Institute for International Economics

In such circles you never go wrong by suggesting more easing of monetary policy especially as central banks are in a lot of trouble right now and will clutch any straw.

As to a profit for the Bank of England that will cause some red faces plus on a more serious note is a counterpoint to its QE losses. They have improved too with the Gilt market rally but as so often the media has left the building.

I have left the money supply data to lat because in truth they were so distorted by the September excitement it is hard to say what they now mean.

The flow of sterling money (known as M4ex) sharply decreased, to -£16.3 billion, in October, from £73.8 billion in September.

The UK bond market does not believe the Bank of England

Yesterday we heard quite a bit from policymakers at the Bank of England. But before we get to it the economic world it faces has changed in a couple of important respects. One I pointed out on Twitter in the morning.

The UK ten-year yield has fallen below 3% this morning as UK borrowing costs continue to tumble…

So the “Black Hole” in UK public finances if it ever existed is now smaller. Also a subject which was in the news has seen some radio silence. For out purposes if we switch to the fifty-year yield at 2.84% we can borrow much more cheaply. Quite a few castles in the sky have crumbled which is probably why we are not hearing much. It is taking its time to feed into mortgage rates but it is beginning.

Mortgage rates on five-year fixed deals have dipped below 6 per cent for the first time in nearly two months…….The average rate on a five-year fixed-rate mortgage fell to 5.95 per cent on Tuesday, the lowest level since early October, according to data provider Moneyfacts. ( Financial Times).

As ever the declines come more slowly than the rises but more have happened since Tuesday so it is in play now. On this road we see something else which is really rather awkward for those who claimed that the Bank of England lost £65 billion when it intervened in the UK Gilt market as long-dated yields soared. Its £19.3 billion holding is on quite a nice profit as we stand and they start selling next week.

Next up is quite a change for the UK Pound.

GBP through 1.21 ( @CNBCJou )

This is really rather different to the panic around US $1.03 which was rather short lasting as we have seen a change in the strength of the US Dollar. The move if sustained will help in bringing inflation down as we have to pay less for commodities and especially in an energy crisis oil and gas.There is an old Bank of England rule of thumb for this and it suggests that the equivalent tightening of monetary policy is of the order of a 1.25% increase in Bank Rate.


On Wednesday Chief Economist Huw Pill spoke to the Institute of Directors and got himself in rather a tangle again.

By the autumn of 2021, the need to start tightening the monetary policy stance was becoming more evident as those new inflationary shocks mounted.

So evident in fact he did nothing about it! Then we got this.

Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group………rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy.

This is an issue we have looked at and Huw wants to use it as an excuse for failed monetary policy but he hit trouble the very next morning.

Overall, net migration continued to add to the UK population in the YE June 2022, with an estimated 504,000 more people arriving long-term to the UK than departing. ( Office for National Statistics)

As you can see the potential labour supply situation was looking rather different and Huw yet again was in a tangle.

Bank of England Watchers Conference

Here Sir David Ramsden spoke although he prefers to be called Dave. He opened with something of a tale of failure.

Inflation is now expected to peak at 10.9% in 2022Q4,
over three times higher than was forecast only a year ago,

Actually it has already reached 11.1% but I guess Dave has been playing with his set of economic models again. Also why should anyone take much note of a body which has just been so wrong?

before falling sharply from the middle of 2023, to well below target by 2024Q4.

After all they are confessing to have been completely wrong about economic growth as well.

With the economy already likely to be in a recession which is forecast to be prolonged, GDP growth is negative in the year to 2023Q4 and 2024Q4, to 7.5 per cent below what was forecast a year ago.

Just to complete the set they were also completely wrong about the labour market.

Despite much weaker growth, unemployment looks likely to be lower in 2022Q4 than was forecast a year ago
and wage growth is forecast to be much higher, 5 ¾% compared with 1 ¼%.

As the World Cup is in we can look at this in the light of a football manager any of whom would have been sacked ages ago for such performances. But it is an other worldly place highlighted by the fact that Dave is the Bank of England “markets man” despite having zero experience of working in one.

He thinks he is looking decisive here but he is merely illustrating my point that making larger increases later is a signal of failure.

As the MPC has become increasingly focused on the prospect of more persistence in inflation, it has tightened policy more sharply. In the five meetings from December 2021 to  June 2022, Bank rate was increased by 1.15 percentage points in total. In the three meetings from August 2022 to November 2022 Bank rate has been increased by a cumulative 1.75 percentage points.

Then we get to something that makes me wonder if he has been reading me?

We have increased Bank Rate very rapidly over the last year and on past experience a change in interest
rates has its peak impact on inflation only after around 18-24 months. But it is possible that the increased proportion of households on fixed rate mortgages means the full effect of policy takes longer to come through and/or is larger when it does, such that inflation comes down more quickly through 2023.

Actually there is one divergence and that comes from his maths as the move is more likely in early 2024. It is quite a critique of the Bank of England and central banks generally.

What next? He wants us to think he is keen on more.

then I expect that further increases in Bank rate are going to be required to ensure a sustainable return of inflation
to target. Considerable uncertainties remain around the outlook and if the outlook suggests more persistent inflationary pressures then I will continue to vote to respond forcefully.

The next bit can be taken two ways. The first is that he is at least being honest and the second is that he wanted to pre-empt someone else pointing it out. Here he is from February.

“I do not envisage Bank rate rising to anything
like its pre-2007 level of 5%, let alone to the kind of levels we used to see before the MPC was formed in 1997”


The first issue is why was I not at a Bank of England “watchers” conference? Easy as I was not invited. Switching to policy there is a simple logical problem. If you tell people about a “prolonged recession” and revise your GDP growth path down by 7.5% then you are going to see bond markets look ahead to future interest-rate cuts. All the rhetoric in the world will not change that. Putting it another way the ten-year yield was the same as Bank Rate yesterday morning meaning they expect that the interest-rate rise in December ( 0.5%?) and any subsequent ones will be reversed.

Markets ebb and flow and the ten-year yield is 3.1% as I type this. But the Bank of England faces an issue created by its own forecast of a severe recession which was created by its assumption of a 5.25% Bank Rate.

Actually the real player is a combination of energy prices and what the weather does this winter.





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

The QE era now starts to make withdrawals from the UK Public Finances

This morning we have been updated on the latest figures for the UK public finances and let me start with something rather familiar.

UK PSNB Ex Banking Groups Oct: £13.5B (est £21.5B; prev £20.0B)

Yes those who did the forecasts expected £21.5 billion and got £13.5 billion as we wonder if this was part of their job application to join the Office for Budget Responsibility. Speaking of it there was an rather extraordinary defence of it or perhaps his salary by one of its leaders on Bloomberg last week.

The Office for Budget Responsibility’s David Miles told me earlier that the fiscal watchdog’s forecasts are a bit like a sat nav  Good for telling you the direction you’re going in, “always wrong” on the specifics — things always change.

I do not know about your experience of sat navs but when I put in Battersea they bring me home rather than taking me to Brighton as the David Miles version would. I can’t see his version catching on. Still it is pretty well paid for someone who is always wrong.

Your fee is determined by the Treasury and paid by the OBR, and will be £5,356.64 per
month, less statutory deductions as mentioned below

That is for only half the week and another 20% goes into his pension fund.


Whilst better than expected by many the numbers remain quite large.

In October 2022, the public sector spent more than it received in taxes and other income, requiring it to borrow (public sector net borrowing, PSNB ex) £13.5 billion, which was £4.4 billion more than in October 2021 and the fourth highest October borrowing since monthly records began in 1993.

This time around there was something going on with receipts and something I have warned about.

Central government receipts in October 2022 were estimated to have been £70.2 billion, which was £0.7 billion less than in October 2021. Of these receipts, tax revenue increased by £2.5 billion to £51.7 billion.

So other receipts were struggling which sent my eyes straight to this.

Since January 2013, HM Treasury has received regular payments from the Bank of England Asset Purchase Facility Fund (APF) under the indemnity agreement. These payments have now stopped. As a result, central government interest and dividend receipts in October 2022 were estimated to be £1.1 billion, a reduction of £4.3 billion compared with October 2021.

This is an issue that our establishment have long turned their heads away from but as the Bank of England pays Bank Rate on its reserves that has outrun the coupons from its holdings. Remember they were very low during the pandemic period as it drove yields to record lows. Probably does not feel quite so bright now and it will be worse from now on as the 0.75% Bank Rate rise in November has yet to impact. The government gained about £120 billion from QE via transfers but the tide which was coming in is now going out.

Central government spent a fair bit more as well.

Central government bodies spent £76.8 billion on current (or day-to-day) expenditure in October 2022, which was £6.5 billion more than in October 2021.

As so often these days we see that energy was a big factor here as the Energy Bills Support Scheme began.

This month sees the first tranche of EBSS payments, with £1.9 billion of central government expenditure recorded as a current transfer from government to households,

As it stands we do not have an estimate for the October cost for help to businesses/

Payments for the EBRS for businesses will also be recorded as subsidies, but no estimate is yet available for the October 2022 amount.

I cannot see the Energy Price Guarantee ( £2500) being itemised either which is rather a poor show.

Debt Interest

This is now much higher in terms of an overall trend but as it happens was the same as last year.

In October 2022, the interest payable on central government debt was £6.1 billion; £3.3 billion reflected the impact of the RPI.

The numbers have their quirks as in there is a 3 month lag for inflation and some months have more payments than others. Also much of the inflation indexing is added to the debt rather than actually paid out so the issue gets another later of complexity.

One thing that we do know is that issuing debt has got quite a bit cheaper than it was with the UK fifty year yield now 2.83% as opposed to the over 4.5% it rallied to in the post mini-Budget panic.


You may have thought we have already fully covered that but at the same time as the payments coming into the UK Treasury were fading away it also had to pay out.

This month the Bank of England Asset Purchase Facility Fund (APF) received its first payment from HM Treasury under the indemnity agreement (previous payments were made by the APF to HM Treasury).

This £0.8 billion of central government expenditure has been recorded as a capital transfer to the Bank of England,


This is a complex issue as the activities of the Bank of England have inflated it.

The Bank of England contributed £309.4 billion to public sector net debt at the end of October 2022.

Some of this is the mark to market losses on its QE holdings but the larger amount is its Term Funding Scheme which I do not consider to be debt in the conventional sense. It is backed by another financial asset. So when they mature over the next 2/3 years our public finances will not really be improving. You could put a margin of say £20 billion for any losses but more seems rather a hairshirt.

Standing at £2,150.5 billion at the end of October 2022 (or around 85.2% of GDP), PSND ex BoE was £309.4 billion (or 12.3 percentage points of GDP) less than PSND ex.


We have become used to there being issues with the public finances and I still shake my head in what is supposed to be an IT age that we do not have more precise numbers. Indeed for what is one of the topics du jour ( energy subsidies) we have in some cases no numbers at all. I would be expecting another £2.5 billion for households for October.

Switching to the public finances implications of QE I have to confess I am wondering if that was another reason for the delays and dithering on raising interest-rates? Central banks were keeping their own funding costs as low as possible to further please their government masters. After all so many at the Bank of England come straight out of HM Treasury. If they had taken my advice back in 2013 to shrink the QE portfolio we would be in a better place.

Next up is the government itself which only a couple of months ago was embarking on a fiscal stimulus and now after spinning like  a top now espouses a form of austerity. So you can argue the numbers are good or bad! But one thing that would be bad or the new supposed austerity would be if this was carried out.

Shell will review £25bn of investments in British projects after the chancellor extended the windfall tax on energy companies, its UK chairman has told Sky News.

The ECB faces higher interest-rates and losses on its bond holdings

This morning in Frankfurt ECB President Christine Lagarde has been setting out ger stall on monetary policy. In essence she is presenting herself as a doughty and valiant inflation fighter.

For the ECB, displaying our commitment to our mandate is vital to ensure that inflation expectations remain anchored while inflation is high. We are committed to bringing inflation back down to our medium-term target, and we will take the necessary measures to do so.

How is that going? Well the Deposit Rate of 1.5% rather pales when we note this.

The euro area annual inflation rate was 10.6% in October 2022, up from 9.9% in September. A year earlier, the
rate was 4.1%. ( Eurostat)

Even she will struggle to find an economic theory that suggests an interest-rate some 9.1% below the inflation rate will be a success. Also there is something else in the detail which raises an issue we no longer get told about which is convergence with the Euro area. Anybody can see how that is going too.

The lowest annual rates were registered in France (7.1%), Spain (7.3%) and Malta (7.4%). The highest annual
rates were recorded in Estonia (22.5%), Lithuania (22.1%) .

What will she do?

Although she does not put it like that this is quite a confession of failure.

Inflation in the euro area is far too high, having reached double digits in October for the first time since the start of the monetary union.

Then she sets out her case.

That is why we have been raising rates at our fastest pace ever – by 200 basis points in our last three policy meetings. These rate increases help us to withdraw support for demand more quickly. And they send a clear signal to the public of our determination to bring down inflation, which will help anchor expectations.

She is determined to give the impression of action and “200 basis points” sounds so much better than 2% which some may start comparing with an inflation rate above 10% as inflation is never expressed as 1060 basis points.

Then we get her main message.

We expect to raise rates further – and withdrawing accommodation may not be enough. Ultimately, we will raise rates to levels that bring inflation back down to our medium-term target in a timely manner.

That is being taken as aggressive although a little care is needed because the estimate of the neutral rate for the Euro area is similar to the inflation target at 2%. So we will presumably be there next month. Technically as some say below 2% we will be there next month on current expectations.

Trouble Trouble Trouble

We find ourselves in Taylor Swift territory because President Lagarde is keen to emphasis this.

As I explained recently, how far we need to go, and how fast, will be determined by the inflation outlook.

And again.

In this setting, displaying commitment to our mandate is vital to ensure that inflation expectations remain anchored and second-round effects do not take hold.

Perhaps she should talk to this woman.

Despite eurozone inflation hitting a record high of 4.9 per cent in November, well above the ECB’s target of 2 per cent, Christine Lagarde said it was likely to have peaked and would decline next year.
“I see an inflation profile that looks like a hump . . . and a hump eventually declines,” she said at a Reuters virtual event. Lagarde also repeated her assertion that the ECB was “very unlikely” to raise interest rates next year. ( Financial Times 11 months ago)

It is hard to believe now that 4.9% was a record as we have more than double that. But the fundamental issue is that someone who has been about as wrong as you can be on inflation wants us to look forwards based on her expectations. What could go wrong?

This is a real issue of our times because policy is frequently based on forecasts from bodies which are awful forecasters. In my home country the media were plugging numbers from the Office for Budget Responsibility ignoring the fact that it is always wrong. Here we see that the ECB President is in effect going to be setting the wrong interest-rates because her expectations are much more likely to be misleading than useful.

Why do they do it. Well they can manipulate expectations much more than the actual numbers. Whilst their impact on the actual numbers is for example omitting owner occupied housing that is much less than their crimes with assumptions and forecasting.


This is something else which is awkward. During the pandemic central banks basically threw cheap money at the banks. In the Euro area the cries of “The Precious! The Precious!” were so loud they were paid via negative interest-rates to take the money. That is now awkward because they could round-trip it and get 1.5% now and presumably 2% next month. We do not often see a real world example of the economics concept of “free money” but this is one.

Even the ECB realises that hard pressed workers and consumers will be unhappy about this so they changed the rules.

That is why we recently decided to amend the terms and conditions of our targeted longer-term refinancing operations (TLTRO-III).

Well today is the day or rather the first tranche of repayments.

It brings with it 2 problems. The first is back to expectations and forecasts as the ECB hot this wrong by making it too easy for the banks. Also I recall Mario Draghi assuring us it was a “rules-based organisation” as it has just broken them.

Quantitative Tightening

This is another area that could go off like a hand grenade. We start with a familiar issue which is that this time last year the ECB was still singing along with Andrea True Connection.

More! More! More!

This particularly matters because it was expanding the money supply and easing fiscal policy into an inflation surge. So exactly the opposite of what it is supposed to do. We are back to expectations and forecasts again and the problems when you get them so wrong. Now we are told.

In December we will lay out the key principles for reducing the bond holdings in our asset purchase programme portfolio.

This is being forced on them because some of the holdings are getting expensive now. If you buy bonds and negative yields then paying 1.5% on them means you have a running cost of 2% per annum which will rise. Next on a mark to market basis there will be large losses in some cases. For example looking back on my chart the Italian bond future has lost 21% over the past year. The German one has lost 18%.

Central bankers around the world are looking at QT as they panic about the losses they have made and the running cost which in an irony is being made higher by their own actions.


The simplest issue here is the Bananarama critique of monetary policy.

It ain’t what you do, it’s the way that you do itIt ain’t what you do, it’s the way that you do itIt ain’t what you do, it’s the way that you do itAnd that’s what gets results

In essence they responded last and have done the least of the central banks which are raising interest-rates. This is a particular issue because monetary policy needs to act in advance ( at least a year) as it takes time to operate. Due to the move towards fixed-rate mortgages the lags have got longer. Actually the latter means that the ordinary person on the Frankfurt or Paris omnibus is better at forecasting than the central bankers.

Next up is the elephant in the room.

Additionally, although recent data on GDP growth have surprised on the upside, the risk of recession has increased.

Actually I think the Euro area is in recession but let us use our translator on what she has said. There is no cheerleading about the GDP growth so she doesn’t believe it either. Also mentions of “recession” by a central banker are not to forecast it they are there because they have been warned it has arrived and they need to cover themselves. Later she will claim to have been on the case and most will take that at face value.

Next up is the suggestion that the recession might last for quite a while.

At the same time, historical experience suggests that a recession is unlikely to bring down inflation significantly, at least in the short run.

This is reinforced by the fact that she is giving herself scope to blame others.

In the current environment of high inflation, fiscal policy needs to be temporary, targeted and tailored. It should be temporary, so that it does not push up demand too much over the medium term; targeted, so that the size of the fiscal impulse is limited and benefits those who need it most; and tailored, so that it does not weaken incentives to cut energy demand.

Considering how wrong she has been you might reasonably think she has quite a cheek telling others what to do…