Was the Fed a case of Much Ado About Nothing?

We have become used to central banking being a bit dull, certainly compared to March last year. They essentially opened the monetary taps and have spent the intervening period not doing much. We have had some fiddling at the edges and a lot of open mouth operations, but last night the stakes were higher because of the pace of the recovery in the US economy. If we move to the effect we can see that markets made an immediate response.

After FED meetings, gold fell down significantly in the last Newyork session, from $1860/oz to $1800/oz, then went up back to $1820/oz ( @fxstreet)

So Gold was hit immediately and the futures contract is at US $1810 this morning meaning that $50 was knocked off its price. So it has been a bad 24 hours for Gold bugs and places were it is held such as India. This gives us our first hint of some news about interest-rates.

Hollar Dollar

Investing.com gives us the picture.

At 3:15 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was traded 0.2% higher at 91.418, after surging nearly 1% overnight, its biggest rise since March of last year.

The rally meant that we have seen some big figure changes with the Euro pushed below 1.20 and the UK Pound £ pushed below $1.40. They should not matter but often do. Also there was some relief for the Bank of Japan as the Yen weakened to 110.60 as it continued a weaker run for the Yen since the days it ended up being pinned around 104.

Bond Markets

Having established a theme of financial markets responding to something about interest-rates we now move to one which gives a qualified response. What I mean by that is yes we get some confirmation from a 0.07% rise to 1.56% for the US ten-year yield but it is not a large move. Also bond yields had been falling for the last couple of weeks so net we are still lower.

The Federal Reserve

The initial statement only gave is a couple of hints.

 Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.

So some confirmation of an improvement and we also got the beginnings of covering their backside on inflation via the use of “largely”

Inflation has risen, largely reflecting transitory factors

But neither of those explain the market response. Nor does the interest-rate change which was announced.

The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 0.15 percent, effective June 17, 2021.

The 0.05% move was also applied to the troubled reverse repo market which went from 0% to 0.05% and we see why from this.


We have looked at this several times before where the monetary push from the Federal Reserve has been added to by the fiscal stimulus and the cheques in particular leaving the banking system awash with cash. The pressure has been such there has been a danger of negative interest-rates spreading ( we have seen some in US Treasury Bills). I know it is an irony but the Fed is now acting to stop further falls in interest-rates. Or as Stevie V put it.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh

The US Treasury has been asleep here as it could have helped by issuing some more bonds, it is not as if it will not have deficits to finance.


More meat came here.

However, the jolt came when new projections saw 11 of 18 central bank policy makers plan for two interest rate increases of 25 basis points in 2023, a year earlier than expected, and a sharp change from the previous meeting when none of these officials were looking for hikes during that year.  ( Investing.com)

Such was the shift that the projection had a 0.6% expectation for interest-rates in 2023 or two 0.25% hikes from the present 0.1%. This led to this perception.

“With the world’s so-called ‘smartest market’ expecting a quicker and more aggressive liftoff in interest rates, the fallout from this Fed meeting could continue to drive all markets in the days and weeks to come,” said Matthew Weller, Global Head of Market Research at GAIN Capital. ( Investing.com)

I have no idea how he could consider that to be aggressive but each to their own. As to the meaning of the shift well I well leave that to Chair Powell.

FED Chair Powell: Not Appropriate To Lay Out Numbers That Mean Substantial Further Progress

Dots Are Not A Great Forecaster Of Future Rate Moves

– Didn’t Discuss If Liftoff Appropriate In Particular Year  (@LiveSquawk )

This is a bit awkward because having sent a signal about higher interest-rates you then say that it does not mean much. Ironically he is of course correct with the statement that central bankers are not great forecasters of future rate moves, and he has thus just torpedoed the “Forward Guidance” claims that have been pressed over the past few years. It gets more awkward as we note they have predicted a “Liftoff” in 2023 but didn’t discuss it. What did they discuss then?

If we return to the dot plot then we see this from Chair Powell back in March 2019.

Each participant’s dots reflect that participant’s view of the policy that would be appropriate in the scenario that he or she sees as most likely.

That could be from Sir Humphrey Appleby in Yes Minister.

Taper Talk 

Essentially it remains that because there is no change.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.


In some ways this echoes the much ado about nothing line from William Shakespeare. The Fed has sent a signal with its forecasts but it is hard not to smile at reports it is being hawkish, especially when CPI inflation is at 5%. Also raising interest-rates in 2023 is an inversion of monetary policy leads and lags with inflation higher now. If it is transitory then why bother? Indeed I could go further because in its forecasts is the assumption that the “normal” level of interest-rates is now 2.5%, does anyone actually believe that? None of this deals with house price rises in double-digits.

The Tapering of QE is an issue where some will keep talking about it and claim to be right should it happen forgetting the failed lottery tickets they previously bought. But my view is that the central banks are all hoping someone else will move first. I know that the Bank of Canada has acted but having bought around 40% of the market in short order it soon would have been out of road anyway.

So we are left with markets and if they have pushed the US Dollar upwards and it persists then they may have achieved something. Although did they intend to? Also we have the nuance which is do we have a clear cause and effect or were markets waiting for a trigger and without the Fed something else would have come along?

Also we saw a bit of insurance taken out against the future.

The Federal Reserve on Wednesday announced the extension of its temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021

So they can use the word temporary…….




The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.


This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.


There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.



The UK inflation debate is heating up

The last 24 hours have seen quite a pick-up in the debate over likely levels of infation in the UK. The starting gun was fired by a letter to the Financial Times from Baron King of Lothbury although I note it is described as coming from Mervyn King. Actually the opening is really rather curious.

Price stability is when people stop talking about inflation. It is a long time since inflation was a talking point and memories of an inflationary past are short.

That is because much of 2021 in financial markets has revolved around talk about inflation. Indeed whilst I doubt the word “transitory” is used on the modern equivalent of the Clapham omnibus those who follow financial markets will be aware of its significance. We have inflation building in the world financial system and central bankers are ignoring it because they claim it will fade quickly. The headline case of this comes tomorrow with the US CPI numbers for May. But perhaps such matters do not get discussed at the House of Lords.

Our member of the most noble order of the garter is on much warmer ground here I think.

First, the large monetary and fiscal stimulus injected in the advanced economies is out of all proportion to the magnitude of any plausible gap between aggregate demand and potential supply.

Whilst in many areas we have little idea of potential supply the stimulus has been so large he has a case which is also true about the area below.

The silence of central banks on current high growth rates of broad money has been deafening.

This is a subject to which a blind eye has in general been turned. Actually central bankers will be keen on part of the formal monetarist argument here. That is that the broad money growth flows straight into nominal GDP ( Gross Domestic Product) growth with a lag. They are hoping this will happen much more quickly than the 18/24 month lag of traditional theory. Also their swerve if you will, is assuming it will turn into real growth rather than inflation. The latter is the rub and if history is any guide we will see some and as the push has been large the risk is that the inflationary impact is large too.

The next bit meshes several arguments together.

Second, a combination of political pressure to assist in financing budget deficits, unwise central bank promises not to tighten policy too soon and an expansion of central bank mandates into political areas such as climate change, all threaten to weaken de facto central bank independence leading to a slow response to signs of higher inflation.

It is nice to agree with him for once as the bit suggesting central bank “independence” has effectively morphed into keeping bond yields low is true. The mission creep argument is also true as central banks get out tins of green wash. The Bank of England got out another tin yesterday.

Today we launch an exercise to find out how climate-related risks could affect large UK banks and insurers. Our Climate Biennial Exploratory Scenario investigates the effects of taking climate action early, late or not at all.

Considering the problems they have had with economic models which is supposedly an area of expertise then if I was them I would steer clear of scenarios about which it must know even less.

Our climate scenarios help us to understand the risks UK banks and insurers may face from a hotter world. In our scenario where no additional action is taken, global warming reaches 3.3 °C.

As to the mention of unwise central bank promises our Merv is on weaker ground as he made his own.

Finally we end as we started.

It is when central banks stop talking about inflation that we should be concerned.

The issue is summarised by the use of the word “transitory” again. It is being talked about meaning it is the assumed conclusion that is the problem. It leads us to one of the core central banking problems which is if you dither and delay you will be too late. That leads us to the suspicion that this is an excuse not to act as it feeds the “It’s too late now” line of Sir Humphrey Appleby in Yes Minister.

Andy Haldane

Proof that central bankers are discussing inflation was provided this morning by the Bank of England’s chief economist.

Bank of England Chief Economist Andy Haldane said on Wednesday there were already “some pretty punchy pressures on prices” and the central bank might need to turn off the tap of its huge monetary stimulus.

“If both pay, and costs are picking up, inflation on the high street isn’t very far behind. And that’s something, you know, people like me are paid to keep a close eye on and we are,” ( Reuters)

He was on LBC Radio and frankly that could have been from a script written by Baron King of Lothbury. As was this.

“And that may mean that at some stage we need to start turning off the tap when it comes to the monetary policy support we have been providing over the period of the COVID crisis.”

Although even he is being rather vague “at some stage” albeit to be fair he did vote to reduce the planned amount of QE bond buying of which there will be another £1.15 billion today.

This bit is really rather confused.

He has previously warned of the risk of a jump in inflation as the economy bounces back from its lockdown crash.

Haldane told LBC that there was still a need to encourage households to spend which might be made easier if companies paid their workers more.

How can you encourage people to spend in a boomlet ( Bloomberg quote him saying the economy is “going gangbusters”) without risking inflation? The inflation risk rises further if he gets the higher wages he wants.

The final punchline according to Reuters was this.

“The risks at the moment for me are that we might overshoot that number for a bit longer than we’ve currently planned,” Haldane said.


There are several issues here and let’s start with our former Governor. He claims there has been no debate when in fact there has been one but that is the issue as it has been one-sided. Also he has two skeletons in his own cupboard. Back in 2010/11 he “looked through” a rise in UK inflation ( both CPI and RPI) went above 5% and even more significantly that led to a decline in real wages we have never really recovered from. Also in spite of claiming he wanted owner-occupied housing costs in the inflation measure it was on his watch ( the switch from RPI to CPI) they were removed and even more significantly have never been replaced after nearly two decades. So news like this from Monday points straight at him.

“House prices reached another record high in May, with the average property adding more than £3,000 (+1.3%) to its
value in the last month alone” ( Halifax)

If we now switch to our “loose cannon on the deck” Andy Haldane there is the issue of wages. These have been struggling in the UK for more than a decade. Recent evidence albeit from the US is that firms have resisted raising wages in response to shortages. Also some workers have found the furlough schemes to be a disincentive. Thus the picture here is both cloudy and complex.

But there is something behind this because the central banks have ignored history and seem determined to continue doing so.

India expands QE bond buying as Wholesale inflation rises

Today we can look East and catch-up on the state of play in India. The crucial message from the Reserve Bank of India or RBI earlier was this.

Taking these factors into consideration, real GDP growth is now projected at 9.5 per cent in 2021-22, consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4:2021-22

This is a 1% downgrade as previously it was guiding towards 10.5% as the economic growth rate for the year. The rationale for this is the problems with the pandemic.

Turning to the growth outlook, rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of COVID-19 infections in rural areas, however, poses downside risks. Urban demand has been dented by the second wave, but adoption of new COVID-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive.

This means that India is slowing down as other economies expect to pick-up. Also for once the weather is not taking the blame.

 On June 1, the India Meteorological Department (IMD) has forecast a normal south-west monsoon, with rainfall at 101 per cent of the long period average (LPA). This augurs well for agriculture.

Policy Response

For now interest-rate cuts seem to be out of favour.

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

The RBI is not restricted by 0% in the way that many other central banks now are but we find that policy action is now seen what we used to call the unconventional sector.

Taking these developments into account, it has now been decided that another operation under G-SAP 1.0 for purchase of G-Secs of ₹40,000 crore will be conducted on June 17, 2021. Of this, ₹10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of ₹1.20 lakh crore to support the market. The specific dates and securities under G-SAP 2.0 operations will be indicated separately.

So we will see another 1.2 trillion Rupees of QE which is a 20% increase on the first quarter of the financial year. Looking at the number below we see that if this continues it looks set to be around a fifth of issuance.

It has facilitated the successful completion of central and state government borrowing programmes of close to ₹22.0 lakh crore at record low costs with elongated maturity during 2020-21.

Also the RBI is indulging in some credit easing.

In order to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors, a separate liquidity window of ₹15,000 crores is being opened till March 31, 2022 with tenors of up to three years at the repo rate.

Although it is for a particular and in central banking terms unusual sector.

Under the scheme, banks can provide fresh lending support to hotels and restaurants; tourism – travel agents, tour operators and adventure/heritage facilities; aviation ancillary services – ground handling and supply chain; and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers, spa clinics, and beauty parlours/saloons.

So we have interest-rates kept at a record low, more QE and credit easing.


This is a more difficult area for the RBI which must have heaved a sigh of relief when it saw the monsoon forecast. There are the generic issues we have been looking at elsewhere such as higher oil and commodity prices which will also impact on India. So they will have welcomed this news.

Headline inflation registered a moderation to 4.3 per cent in April from 5.5 per cent in March, largely on favourable base effects. Food inflation fell to 2.7 per cent in April from 5.2 per cent in March, with prices of cereals, vegetables and sugar continuing to decline on a y-o-y basis. While fuel inflation surged, core (CPI excluding food and fuel) inflation moderated in April across most sub-groups barring housing and health, mainly due to base effects.

But the problem is whether this is credible?

Taking into consideration all these factors, CPI inflation is projected at 5.1 per cent during 2021-22: 5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4:2021-22; with risks broadly balanced.

For example if we look further along the inflation chain we see this.

In April, 2021 (over April, 2020) , the annual rate of inflation (YoY), based on monthly WPI,
stood at 10.49% (Provisional) . The annual rate of inflation in April 2021 is high primarily because of
rise in prices of crude petroleum, mineral oils viz petrol, diesel etc, and manufactured products as
compared the corresponding month of the previous year.

There was quite a push on a monthly basis.

The monthly rate of inflation, based on month over month movement of WPI index, in April
2021 stood at 1.86% (Provisional) as compared to March 2021

I am sure that some in India will also be thinking of this from the United Nations yesterday.

The FAO Food Price Index (FFPI) averaged 127.1 points in May 2021, 5.8 points (4.8 percent) higher than in April and as much as 36.1 points (39.7 percent) above the same period last year.

As you can see there has been quite a surge in food inflation which will be a really big deal for India’s many poor.

The May increase represented the biggest month-on-month gain since October 2010. It also marked the twelfth consecutive monthly rise in the value of the FFPI to its highest value since September 2011, bringing the Index only 7.6 percent below its peak value of 137.6 points registered in February 2011. The sharp increase in May reflected a surge in prices for oils, sugar and cereals along with firmer meat and dairy prices.

It does not do an onion index to give us a specifically Indian flavour but as Glenn Frey pointed out the heat is on.


The Rupee has been mostly quiet compared to other periods we have looked at and is at 73 versus the US Dollar. Perhaps it is being boosted by this from Shortpedia.

According to #RBI data, India’s foreign exchange reserves surged by $2.865 billion to a record high of $592.894 billion for the week ended May 21.


There are various contexts here. If we look at the traditional store of value for Indians which is Gold it has seemingly found the air too thin above US $1900 and has fallen to $1873 as I type this. So one Rupee alternative has disappointed over the past year as you might reasonably have expected more than an 8% return. More recently Bitcoin has also struggled so these may be factors helping the Rupee.

Looking at QE we see the RBI expanding its programme as others are talking about reductions, Indeed it mat have been minor but this from the US Federal Reserve on Wednesday was a type of QT.

The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its holdings of corporate bond exchange-traded funds (ETFs) on June 7, consistent with plans announced by the Board of Governors to begin winding down the SMCCF portfolio.

This means that should inflation persist the RBI will be left looking like it has missed the boat deliberately like so many of its central banking fraternity.



UK Bank Rate is 0.1% but quoted overdraft rates are 33.5%

After yesterday’s effect which is the surge in house prices of the order of 10% per annum we can move onto a cause today. This is the monetary expansionism of the Bank of England. It was in play as we noted the way that mortgage availability was arriving again for those with low deposits or equity. That is partly due to the way that the taxpayer has been dragged in to back them under the government scheme. But also there needs to be cash/liquidity in the banking system. The Bank of England made sure of this with its announcement of a new Term Funding Scheme when the pandemic hit, meaning that banks would not have to rely on pesky depositors and savers for liquidity. If we add the new scheme to the existing one we see that it amounts to £110.5 billion which even in these inflated times is a tidy sum.

Rather awkwardly in some ways the deposits flowed in anyway as a consequence of the furlough schemes.

Households continued depositing significant amounts, with an additional £16.2 billion placed in March. Deposit interest rates remained at historically low levels. ( Bank of England)

As you can see by the mention of deposit rates the banks did not have to compete for the money it just arrived in a sort of Dune style the spice must flow. So now the banks have the centrally planned liquidity and the furlough driven deposits in a collision of central planning. This means that downward pressure has been applied to interest-rates just as the Bank of England is looking to keep them out of negative territory, for now anyway! I point this out because the US is presently struggling with this and is seeing some interest-rates heading too low for zero.

Also we see the media allowing central bankers to mark their own homework. Here is BBC economics editor Faisal Islam allowing the Bank of England to do just that.

NEW Bank of England Dep Gov John Cunliffe in BBC interview says “we’re watching very carefully” housing market developments saying “I think what we’re seeing in the housing market at the moment is being driven mainly by the tax holiday”

There is no mention of the policies the Deputy Governor has consistently voted for. Another example of this sort of thing came from the ECB which published a 64 page working paper knowing the vast majority would only hear about or read this bit.

According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so.

In some ways the most amazing part of that is claiming an effect for Forward Guidance or FG. I also note that they seem to have dropped the claims about GDP. Also most consumers and workers will be wondering exactly how higher prices have benefited them?


This morning’s Bank of England release has brought signs of another collision between government and Bank of England policy.

Mortgage borrowing fell back in April. Individuals borrowed an additional £3.3 billion secured on their homes, following a record £11.5 billion in March . This was also lower than the £5.7 billion monthly average borrowed in the six months to February 2021.

This relates to the cliff edge for the Stamp Duty suspension although that in the end got an extension for many until June. Many had already made their plans as you can see from the March numbers. The approvals numbers suggest that the new message did get through in April.

Approvals for house purchase ticked up in April, to 86,900, from 83,400 in March. They have fallen from a recent peak of 103,400 in November, but have remained relatively strong. In February 2020, there were 73,400 approvals for house purchase.

After a period of rising mortgage rates the Bank of England will be pleased to see a decline.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages fell 7 basis points to 1.88% in April. That is marginally above the rate in January 2020 (1.85%), and compares to a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained broadly unchanged at a series low of 2.07%.

For those wondering that does coincide with my leading indicator for this which is the five-year Gilt yield which did dip in April and hints at a nudge higher for May. The latter is more vague because bond yields have gone quieter although in an example of the way percentages can be both accurate and misleading it is up 784% on a year ago.

Unsecured Credit

There had been hints from the banks that credit card borrowing was turning but as you can see not in time for April.

Individuals have made significant net repayments of consumer credit since March 2020 . The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion). As a result, the annual growth rate – while remaining weak at -5.7% in April – rose from -8.8% in March.

Within consumer credit, the repayment in April was concentrated in credit cards (£0.4 billion).

In essence it has been credit card borrowing which has dropped. If we look at the interest-rates I think we can see why.

The cost of credit card borrowing fell by 31 basis points to 17.70% in April. Rates on new personal loans to individuals, in contrast, increased by 62 basis points, to 5.65% in April, compared to an interest rate of 7.03% in January 2020.

Personal loans require more legwork and in some senses commitment via a set term but are considerably cheaper.


I had already noted the surge here and whilst it is past its peak it continues.

Households deposited an additional £10.7 billion with banks and building societies in April. This was the smallest net flow since September 2020 (£7.4 billion) and compares to a net flow of £16.1 billion in March 2021. The flow remained strong relative to recent years, however: in the 6 months to February 2020, the average monthly net flow was £4.6 billion.

Money Supply

They are continuing to pump it up for example via QE bond purchases of which there will be another £1.15 billion this afternoon.

Sterling money (known as M4ex) increased by £11.6 billion in April, down slightly from £12.4 billion in March. Households’ holdings of money continued rising strongly with net flows of £10.7 billion, and PNFCs’ holdings (on a seasonally adjusted basis) increased by £2.3 billion, up from £1.2 billion in March.

The annual rate of growth continues to dip because we are comparing now to the beginnings of last year’s surge but is still 10.9%. The total is now £2618 billion.


The concept of monetarism is very out of fashion at the Bank of England. Indeed the money supply itself has not got a mention for some time. Curious when you consider that they have done this to it.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

I think that they are afraid of any discussion which will inevitably develop into one how about how much economic growth and how much inflation it will cause? Yesterday we saw one example of inflation it has contributed too although it is kept out of the official inflation measures. Think of that, excluding what is for many the largest purchase they will ever make.

Also whilst we officially have effectively zero official interest-rates ( strictly 0.1%) many face rather different ones to that. As I have pointed out via the TFS The Precious! The Precious! has got lots of cash at 0.1% and the government continues to borrow at what are historically low rates. But others we have already seen pay double-digit interest-rates in an example described by Pink Floydi in Us and Them.

Forward he cried from the rear
And the front rank died
And the general sat
And the lines on the map
Moved from side to side

The most extreme example is to be found in overdraft rates which are quoted at 33.5% after an intervention from Governor Andrew Bailey which deserves its own episode of The Thick of It. When he was head of the Financial Conduct Authority his attempts to cut overdraft rates doubled them for many.


UK house prices reach yet another record

Today I am reminded of the sequence in one of The Matrix series of films when the Frenchman tells us about cause and effect. That is because as I wait for another signal of the cause we have seen the effect already.

May saw a further acceleration in annual house price
growth to 10.9%, the highest level recorded since August
2014. In month-on-month terms, house prices rose by 1.8%
in May, after taking account of seasonal effects, following a
2.3% rise in April.  ( Nationwide )

As DJ Jazzy Jeff and the Fresh Prince put it.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room

In case you did not think that the next bit rams it home.

New record average price of £242,832, up
£23,930 over the past twelve months.

That means that the average UK house earned more than its owner over the last 12 months because in general ( for a first house or flat) gains are tax-free. So it needs to be compared to net rather than gross income.

We also know that the low level of transactions seen last year has also been replaced by a boom.

The market has seen a complete turnaround over the past
twelve months. A year ago, activity collapsed in the wake of
the first lockdown with housing transactions falling to a
record low of 42,000 in April 2020. But activity surged
towards the end of last year and into 2021, reaching a record high of 183,000 in March,

The Nationwide thinks that there is much more to it than the Stamp Duty holiday.

Amongst homeowners surveyed at the end of April
that were either moving home or considering a move, three
quarters (68%) said this would have been the case even if
the stamp duty holiday had not been extended. It is shifting
housing preferences which is continuing to drive activity,
with people reassessing their needs in the wake of the

The so-called race for space seems to also be in play. Also the pandemic seems to have given many the equivalent of itchy feet.

At the end of April, 25% of homeowners surveyed said they
were either in the process of moving or considering a move
as a result of the pandemic, only modestly below the 28%
recorded in September last year. Given that only around 5%
of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.


It looks as though all the activity has had a consequence here.

The UK’s biggest builders’ merchant has warned customers of “considerable” cost increases to raw materials amid an industry-wide shortage.
As first reported by the Times, Travis Perkins says the price of bagged cement will rise by 15%, chipboard by 10% and paint by 5% from Tuesday.

It comes as industry groups warn electrical components, timber and steel are also in short supply.

They blame surging demand as lockdown eases, as well as supply chain issues. ( BBC)

Much of the explanation will be familiar to regular readers.

The supply problems stem from a number of factors. Construction industry projects have surged since lockdown began easing which has led to skyrocketing demand for already scarce materials.

There are also issues hitting specific products, such as the warmer winter affecting timber production in Scandinavia while the cold winter weather in Texas affected the production of chemicals, plastics and polymer.

There has also been a sharp rise in shipping costs amid the pandemic.

Mortgage Rates and Credit

This gets a minor mention from the Nationwide.

especially given continued low
borrowing costs, improving credit availability.

In terms of credit availability I presume they mean this change highlighted by Moneyfacts.

May 2021 has seen a surge in the number of 95% loan-to-value (LTV) mortgages available. Our latest data (to May 25 2021) shows 174 mortgages are now available at 95% LTV. The growth of product availability followed the launch of the new Mortgage Guarantee Scheme (MGS) and there are now 49 mortgages available under the scheme.

Remember the days post credit crunch when politicians queued up on the media to say never again to this sort of thing? I guess we are not quite back to what had happened but we are back on that road. Still the banks will be pleased that the taxpayer is assuming a fair bit of the extra risk.

There is a lot going on.

The availability of mortgage deals at 95% LTV is changing daily as lenders launch and close new products due to high levels of borrower demand.

But the best deals as of the end of last week were 3.49% variable and 3.59% fixed-rate.

For those with higher equity ( 40%) May has seen offers of less than 1%.

TSB offers 0.99% (3.2% APRC) on a two year fixed deal, which is available at a 60% loan-to-value (LTV) and charges £1,495 in product fees. Hinckley & Rugby Building Society offers 0.99% (4.5% APRC) as a two year discounted variable, which is also available at a 65% LTV and requires a minimum loan of £100,000. It charges £699 in product fees.

That still feels rather extraordinary even in these times of zero interest-rate policy or ZIRP. Although the numbers are flattered by the fees involved.

Moneyfacts also suggest that there is something going on in the price of credit  for buy-to-let.

Landlords looking to lock into a fixed

Our research into the BTL mortgage market has found that since the start of this month, the average two year fixed BTL rate has fallen by 0.04%, down from 2.99% on the 1 May to 2.95% on the 21 May. Meanwhile, the average five year fixed BTL rate

has fallen by 0.05% during this same period, down from 3.35% to 3.30%.

A sign of what Nelly would call “its getting hot in here” would be borrowing spreading into other types of finance.

Data  from the Association of Short-Term Lenders (ASTL) shows the demand from consumers and businesses to get a bridging loan in the UK has increased at the start of 2021.  Applications have exceeded pre pandemic levels by just over a quarter and the value of these was up 18% comparing Q1 2021 to the same period in 2020.


The record on the Nationwide series for this was 6.4 back in late 2007 and the first quarter of this year showed 6.3 so with the increases we look to be back to the highs. Frankly if we look at what has happened to wages I think there must be some heroic assumptions here to keep it at that.

There is a similar situation for first-time buyers except the numbers are 5.4 and 5.3 respectively.


We will find out more tomorrow about a major driver of this which is the credit easing and monetary expansionism of the Bank of England. I note that they are increasingly deploying open mouth operations on the subject. Today’s effort comes from Sir David Ramsden in the Guardian who is apparently monitoring things.

The Bank of England is carefully monitoring Britain’s booming housing market as it weighs up the possibility that a rapid recovery from the Covid-19 pandemic will lead to a sustained period of inflation, one of its deputy governors has said.

A career as a civil servant is an odd way to become the expert on financial markets you might think.

Ramsden, the deputy governor responsible for markets and banking, said: “There is a risk that demand gets ahead of supply and that will lead to a more generalised pick-up in inflationary pressure. That’s something we are absolutely going to guard against. We are looking carefully at the housing market and a raft of real-term indicators.”

Those looking at the rise in house prices might think that Dave ( as he prefers to be called) is not much of a guard dog. I wonder if he thinks anyone will be convinced by this?

Ramsden said the Bank would not be complacent about inflation. “If it is not temporary we know what to do about that. We can push bank rate up from its historically low level [0.1%] and we know what that will do to demand.”

Meanwhile we have learned over time that the road to ever easier monetary policy and lower interest-rates comes pre-loaded with denials of any such intention. It is a form off PR for central bankers.

From August the Bank’s monetary policy committee will have the ability to push bank rate below zero but Ramsden hinted strongly that he would be wary about such a groundbreaking step.



France sees the economy double-dip but house prices rise

A feature of these times is that official statisticians are struggling to give us accurate data about the state of play in our economies. The irony is of course that it comes at a time when people are keener that ever to know what is happening. An example of that has been seen in France this morning.

In Q1 2021, gross domestic product (GDP) in volume terms* fell slightly:  -0.1% after -1.5% in Q4 2020. It stood 4.7% below its level in Q4 2019, which was the last quarter before the Covid-19 crisis. ( Insee )

This was rather different to what we had previously been told.

 In addition, the estimate for Q1 2021 was revised by -0.5 points, mainly due to the inclusion of construction data, which was significantly less dynamic than the extrapolations used in the first estimate: the evolution of GFCF in construction in Q1 2021 thus fell from +5.1% to +0.6%.

There are a couple of consequences here. Firstly those who have followed my analysis of UK construction numbers will know that we have also had issues measuring this area. Next is that in the circumstances this GDP reading looks more realistic than the previous one and it has a consequence.

PARIS, May 28 (Reuters) – France, the euro zone’s second biggest economy, fell into recession in the first quarter of 2021 with a 0.1% contraction, revised official data showed on Friday.

Personally I think that the depression issue where the economy is 4.7% smaller than a year before is much more significant than any recession debate.

Looked at in the round the main pressure this time came from trade.

Imports remained relatively dynamic (+1.1% after +2.2%), while exports fell slightly (-0.2% after +4.9%). Imports were thus 6.9% below their pre-crisis level, while exports remained further away (-9.9%). Overall, the external balance contributed negatively to GDP growth: -0.4 points, after +0.7 points.

A feature of this depression has been the various furlough and support schemes which have supported incomes.

Gross disposable household income (GDHI) decreased slightly (-0.2% after +1.9%) but remained above its pre-crisis level (+2.3% compared to Q4 2019).

As the ability to spend has frequently been restricted this has led to quite a rise in savings being recorded overall.

As a result of the decline in GDI and the slight increase in households’ consumption (see above), the households’ savings rate declined: it stood at 21.8% after 22.7% in Q1 2021, but still remained well above its 2019 level (15.0%).

Household Consumption

The pattern here had seen a decline but had become stable in the first quarter.

Households’ consumption expenditure was almost stable (+0.1% after -5.6%) and remained well below its pre-crisis level (-6.8% compared to Q4 2019)

Sadly there was another large drop in April.

Household consumption expenditure on goods fell in April (–8.3% in volume* compared to March 2021). This fall was mainly due to the manufactured goods purchases (–18.9%), and was explained by the implementation of the third lockdown from April 3rd 2021 on the whole territory.

This means that the second quarter started badly in economic terms and the consumption depression strengthened.

Spending is thus 9.5% below its average level in Q4 2019.

A feature of the lockdown era has been the effect on the clothing industry.

In April, spending on clothing and textiles was halved (–50.2%), due to shop closures throughout the country.

So we move on with a weaker first quarter and a downwards shove from household consumption in April.

Business Surveys

On Wednesday the official surveys were released and you will not be surprised to read that the retail sector liked the lockdown easing.

In retail trade (including trade and repair of vehicles), the business climate has gained 17 points, driven by the vigorous rise in the balance of opinion on the general business outlook for the sector, with in particular the reopening on May 19 of the so-called “non-essential” stores.

Ditto for the hospitality sector.

In the services sector, the climate has gained 15 points, due to the sharp increase in most of the balances relating to the near future. It also has gone back well above its average. In particular, in accommodation and food service activities, the business climate has bounced back extremely sharply, probably driven by the schedule of gradual reopening.

These have helped drive an overall improvement in sentiment.

In May 2021, the business climate has improved strongly. The indicator that synthesizes it, calculated from the responses of business leaders in the main market sectors of activity, has gained 12 points. At 108, it has returned above its long-term average (100), for the first time since February 2020, and is even higher than before the health crisis (105).

This is a long-running series so that it has credibility from that although it is also true that the previous peak at the end of 2017 when it rose to just under 112 was followed by a decline rather than a rise in the GDP growth rate.

The Markit IHS puchasing managers survey for the first three weeks of May was also upbeat.

“The French private sector moved up a gear in May
as lockdown restrictions were eased and the
economy began to reopen. There was a clear
underlying improvement in demand as new work
expanded at the fastest rate in over three years,
while output expectations were the strongest since
the composite series was first available in July 2012.”

On the other hand the new restrictions on travel from the UK will certainly not help the tourism industry.

House Prices

The Bank of France will be pleased to see a concrete response to all its monetary easing.

In Q1 2021, the rise in prices of second-hand dwellings in France (excluding Mayotte) continued: +1.4% compared to Q4 2020 (provisional seasonally adjusted results), after +2.4% in Q4 and +0.6% in Q3 2020.

The quarterly rises have led to what are fairly stable annual increases.

Over a year, the rise in prices continued as well: +5.9%, after +6.4% and +5.2%. Since the fourth quarter of 2020, this increase has been larger for houses (+6.5% over the year) than for flats (+5.1%), which had not happened since the end of 2016.

The shift from flats to houses has also been seen in the UK and is a response to the lockdown era it would seem.

If we look back there is scope here for fast promotion for a young central banker clutching their MBA or PhD. This is because house price growth in France went positive in 2015 just as the ECB fired up negative interest-rates and QE. Pointing that out will mean the croissant,espresso and baguette trolley will be a regular visitor to their desk.


It seems to be getting itself in rather a twist. Regular readers will recall it is supposed to be buying more bonds via QE under its PEPP programme, although the actual buying has fallen well short of the claims of Christine Lagarde. This is to reduce yields and restore what it considers to be favourable monetary conditions. Well apparently they are not what they used to be. Here is Isabel Schnabel yesterday.

Rising yields are a natural development at a turning point in the recovery: investors become more optimistic, inflation expectations rise and, as a result, nominal yields go up. This is precisely what we would expect and what we want to see.

Make your mind up. There was something worse there too.

I’ve always stressed that when it comes to favourable financing conditions, it’s insufficient to just look at the numbers.

There is a danger there of echoing Humpty-Dumpty.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”


This has been a curious depression. Hopefully it will be a sharp relatively short-lived one but like the First World War it did not end by Christmas. There has however been quite a boom in asset prices. We have already looked at house prices but all the QE bond buying pushed bonds to record highs as well and even with the recent rises the ten-year yield is a mere 0.18%. The CAC-40 has surged to multi-year highs as well although not back to the level of September 2000.

The slow roll out of the vaccine has meant that France’s economy has stagnated again and ironically after all the debate is probably around level with the UK at the moment. Although the UK has been picking up relatively sharply. Let us hope that Bonnie Tyler was wrong about economic growth in France.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Can the US Federal Reserve Taper and QT this time around?

A feature of 2021 so far has been the discussion over what the US Federal Reserve will do next? One factor in this has been the extraordinary amount of monetary stimulus it has pumped into the US economy with near zero interest-rates and a balance sheet expanded to just shy ( 7.92) of 8 trillion US Dollars. That compares the the previous peak of around 4.5 trillion back in 2015. On Monday the New York Fed gave us its view on what may happen next.

The exercise suggests that the SOMA portfolio could grow
through ongoing asset purchases to reach $9.0 trillion by 2023, or 39 percent of GDP. The portfolio is then assumed to be held constant, with proceeds from maturing securities being reinvested. After that point, the path of the portfolio will depend on choices made regarding the portfolio as the FOMC normalizes the stance of monetary policy.

These days normalizes does not mean what it did as those who recall its use back in 2018 or so will recall it meant interest-rates of around 3%. The reason for the expected expansion in the balance sheet is that the New York Fed is still buying at a fairly rapid rate.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per
month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum
employment and price stability goals.

The Economic Outlook

For this quarter we are being told this.

The New York Fed Staff Nowcast stands at 4.6% for 2021:Q2.

Later this afternoon the numbers for the first quarter will be revised and the New York Fed is expecting an increase to over 6%. The numbers are annualised but in our terms a bit over 1% and then around 1.5% are strong numbers. This has been added to by the Markit IHS business survey.

Adjusted for seasonal factors, the IHS Markit Flash
U.S. Composite PMI Output Index posted 68.1 in
May, up from 63.5 in April. The rate of expansion
was unprecedented after surpassing April’s
previous series record.

They went further.

At the same time, new export business rose at the fastest pace since the series covering both manufacturing and services began in September 2014.

Mostly we have seen manufacturing pick up and services lag but the US has moved beyond this according to Markit.

The seasonally adjusted IHS Markit Flash U.S.
Services PMI™ Business Activity Index
registered 70.1 in May, up from 64.7 in April. The
rate of expansion was the sharpest since data
collection for the series began in October 2009.

So the outlook for 2021 looks to be singing along with the Black Eyed Peas.

Boom boom boom
That boom boom boom
That boom boom boom
Boom boom boom


We have previously looked at an inflation rate ( CPI) of 4.2% and house price rises in double digits. The Markit survey above reinforced curreny concerns here.

Inflationary pressures continued to mount in May,
as rates of increase in input prices and output
charges quickened to the steepest on record.
Companies commonly noted efforts to pass through
soaring costs to clients, with prices of oil, PPE and
transportation often cited as fuelling the uptick in

They think this will be felt in the consumer inflation numbers.

Average selling prices for goods and services are both rising at unprecedented rates, which will feed through to higher consumer inflation in coming months.

Forward Guidance

Remember when we were supposed to listen to the open mouth operations of central bankers so we would be better informed about interest-rates? That went really rather wrong. But we can look at what is being said by central bankers who seem to have forgotten that. On Tuesday Mary Daly of the San Francisco Fed was interviewed by CNBC.

“We haven’t seen substantial further progress just yet. We’re still looking for substantial further progress,” Daly said during a live “Closing Bell” interview. “What we’ve seen is some really bright spots, some very encouraging news. It gives me hope, and I am bullish for the future. But it’s too early to say that the job is done.”

As to policy she told them this.

“We’re talking about talking about tapering, and that is what you want out of us. You want to be long-viewed here,” she said. “But I want to make sure that everyone knows it’s not about doing anything new. Right now, policy is in a very good place. Policy is supporting the American people.”

God knows where she is going with “talking about talking…” but what we see here is quite a revision of central bank behaviour which is supposed to look ahead along the lines of the famous take away the punch bowl as the party gets started statement. Whereas Mary seems to want to wait with the risk that the party is over before she does anything.

Vice Chair Randal Quarles spoke yesterday and he seemed quite keen on the house price rises.

Highly accommodative monetary policy by the Federal Reserve has fostered strong growth in interest rate–sensitive sectors of the economy such as housing and durable goods, offsetting some of the historic weakness in the service sector last year.

That is at least more honest than the Bank of England as we recall Sir John Cunliffe turning his blind eye to this issue last week. He also brought in the issue of the fiscal stimulus which is in play in the US.

Even as personal consumption expenditures rose at a huge 10 percent annual rate in the first quarter of 2021, the saving rate averaged 21 percent over those three months. Again, a lot of that reflected the most recent round of stimulus payments.

Then something else which would have in the past led his predecessors to raise interest-rates.

The underlying strength in hours and wages lends support to widespread reports that worker shortages are impeding hiring. Labor force participation remains about 3‑1/2 million people lower than before COVID-19.

But he has no such intention.

In contrast, the time for discussing a change in the federal funds rate remains in the future

Only some sort of vague promise to maybe look at tapering or QE reductions at some future date.

If my expectations about economic growth, employment, and inflation over the coming months are borne out, however, and especially if they come in stronger than I expect, then, as noted in the minutes of the last FOMC meeting, it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings


There are three especially significant starting points for all of this. The US Federal Reserve is the world’s most important central bank due to the size of the US economy and the reserve currency role of the US Dollar. Also the US economy is presently leading us out of the Covid-19 economic malaise. Finally whilst other central banks have reduced purchases of bonds and the flow of QE it is the only one to have cut back the amount or apply Quantative Tightening or QT in 2017-19 when some US $700 billion was pruned.

But now as you can see it looks to be scared of its own shadow and unsure of its role. It raised its inflation target on dubious grounds and now finds that if April was any guide it has underestimated the push the reopening would give it. It seems to be hanging onto QE on two grounds. Fears for what would happen to the US bond market and in case the economy dips at any point. Along the road we are seeing policy swing both ways. Firstly as has been discussed in the comments the market situation has applied a sort of short-term QT.

Demand for an overnight funding through the Federal Reserve Bank of New York’s overnight reverse repo program (RRP) has begun to flirt with recent records highs, after almost no one used it for months.

Daily repo usage jumped to $450 billion on Wednesday, its highest level since the December 30, 2016, according to Fed data. ( MarketWatch)

This is in many ways a response to the fact that some short-term interest-rates rather than rising as you might expect have fallen to 0% in response basically to all the cash in the system.

Another way of looking at all of this is that just as you might reasonably have expected US bond yields to be rising ( the recovery plus inflation) if anything they have drifted lower. Back on the 17th of March when we looked it was 1.63% whereas now it is 1.58%.

If we step back the issue post credit crunch was that they would delay taking the stimulus away. So we are on the verge of the same mistake.

The UK Public Finances begin to improve as the economy picks up

There was a hopeful signal for the UK Public Finances this morning as I noted that the UK TV media were ignoring them. So let us take a look.

In April 2021, the public sector spent more than it received in taxes and other income requiring it to borrow £31.7 billion, £15.6 billion less than in April 2020 but still the second highest April borrowing on record.

One would expect a better number than last year as we are comparing with the initial lockdown but it also implies a better trajectory than suggested by the Office for Budget Responsibility.

UK public borrowing in April is now estimated at £31.7bn, about 20 percent below #OBR projection of £39bn. ( Andrew Sentance)

So our first rule of OBR Club that the OBR is always wrong is off to another good start. As in terms of the fiscal year is the economy according to tax receipts.

Central government receipts were estimated to have increased by £3.8 billion in April 2021 compared with April 2020 to £58.0 billion, including £42.5 billion in tax receipts.

Looking into the detail we see that VAT receipts were up by 8.8% and Pay as You Earn income tax up by 16.4% backing up the reopening of the economy vibe. There was a curious number as well suggesting a surge in smoking as Tobacco Duty rose by 183.5% on last year to £700 million. Staying with sin taxes alcohol receipts were up by 15.6% as well which if I recall correctly is in addition to the post pandemic rise in drinking.

There was also a signal of a strong housing market because even though the Stamp Duty threshold has been raised to £500,000 receipts were up by £400 million or 71% on last year. Finally the numbers are better than what they look because the Bank of England paid some £3.7 billion less to the UK Treasury than last April so allowing for that receipts were in fact some £7.5 billion better.


As you would expect we spent less this year in April.

Central government bodies spent £95.9 billion in April 2021, £12.9 billion less than in April 2020.

In fact the main player was local government.

Central government current transfers to local government were £16.7 billion in April 2021, £11.6 billion lower than in April 2020. In part, these payments enable local authorities to fund coronavirus policies.

Central government saw more of a shift in what the money was spent on than a change. Procurement and wages rose and net investment rose by £2.3 billion but subsidies to business fell by over £5 billion.

In terms of supporting employment this was spent.

In April the government spent £3.0 billion on the Coronavirus Job Retention Scheme (CJRS) and £2.5 billion on the Self Employment Income Support Scheme (SEISS).

Also some £1.1 billion was saved on contributions to the European Union compared to last year.

The Bigger Picture

There was some better news here as well as a sobering total.

In the financial year ending (FYE) March 2021 (April 2020 to March 2021), the public sector borrowed £300.3 billion, £243.1 billion more than in the same period last year.

That was the sobering bit as it is nearly double the £157.7 billion peak of 2010. The better news is below.

revised down by £2.8 billion from last month’s first provisional estimate.

One can also look at this compared to annual economic output.

Expressed as a ratio of gross domestic product (GDP), public sector net borrowing (PSNB ex) in FYE March 2021 was 14.3%, revised down by 0.2 percentage points from last month’s first provisional estimate; it remains the highest such ratio since the end of World War Two, when it was 15.2% in FYE March 1946.

Oh and the first rule of the OBR Club was in play again.

Public sector net borrowing (PSNB ex) in FYE March 2021 is estimated to have been £27.1 billion less than the £327.4 billion expected by the Office for Budget Responsibility (OBR) in their Economic and Fiscal outlook – March 2021 on a like for like basis.

Looking Ahead

On Friday the Financial Times noted this.

As lately because the chancellor’s March 3 Funds, Britain’s fiscal watchdog predicted the government would want to borrow £233.9bn in 2021-22 to take care of the pandemic, however the FT calculates that may now be as little as £150bn.

There are several reasons for this. As we have already analysed the OBR was too pessimistic for last year. Not only was its forecast of borrowing too high it thought UK GDP was 10% lower when it is more like 6%. Then it feels the UK economy will grow by a bit more than 4% this year as opposed to the 7-8% that most others think.

This was something of a change for the Financial Times which seems to be in the process of doing a U-Turn on UK economic prospects. But for the OBR this is an issue that even the FT cannot ignore. As to hope for the future well this is from the Chair of the OBR Richard Hughes at the end of last month and the emphasis is mine.

I should stress that my remarks concern the forecasting profession as a whole (in the UK and around
the world), and not the OBR in particular who, if anything, have been at the forefront of innovation
and adaptation in this area long before I arrived.

I think he means innovation in the sense of the Irish banks who in their crisis described what turned out to be a road to collapse as “innovative”

National Debt

This is a story which has become more complicated than it needs to be and it revolves around the way the activities of the Bank of England are measured and counted.

Public sector net debt (excluding public sector banks, PSND ex) was £2,171.1 billion at the end of April 2021 or around 98.5% of GDP, the highest ratio since the 99.5% recorded in March 1962.

That is where the story starts but there is a kicker.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of April 2021 would reduce by £224.6 billion (or 10.2 percentage points of GDP) to £1,946.4 billion (or 88.3% of GDP).

A bit more than half of that is because the Bank of England’s holdings of UK Gilts ( bonds) are worth more than it paid for them. Yes you did read that correctly where a profit becomes a debt.

There may be some losses in all the Bank of England activity but an allowance of say £20 billion or so seems sensible at this stage.


The numbers today continue the better news from Friday where we saw signs of the UK economy picking up quickly. That has fed through into the pubic finances and that seems likely to continue this month as well. Projecting that forwards leads to a lot better picture for 2021. However the welcome news puts us in a position where we will have borrowed some £400 billion or so more than previously expected. Whilst Gilt yields remain low as even the fifty-year is a mere 1.15% we can be relaxed about the affordability of this for now we do have a higher burden. So we cannot afford much of a rise in debt costs which means that we are reminded that the future is of low interest-rates and more frequent Bank of England bond buying or QE

Returning to the Tobacco Duty issue social media has come up with a couple of suggestions. One is that we are smoking some more. The other is based on this.

Nope, lack of Duty Free cigs due to non-travel. ( @Iansharpsmithy)

Oh and also this from Philip Aldrick of The Times.

Or was it harder to smuggle them in ?

Perhaps we have been miscounting for a while?

No. Because nobody has been allowed to travel, they are having to buy U.K. cigarettes. It’s been underestimated for years how much comes in from abroad, mostly Poland. They have been overestimating how many people have stopped smoking. Just stopped paying UK prices for them. ( @gibraltarfx )

Japan is struggling with its economy and coronavirus as well as the Olympics

The Coivd-19 pandemic has highlighted many of the issues we have been noting in Japan in its “lost decade” period which now of course has run for decades. The most recent has been a growing list of countries recording low birth rates which reminds us of Japan and its issues with that an consequently demographics. Next comes the increasing use of QE ( Quantitative Easing) bond buying around the world which echoes the behaviour of the Bank of Japan.That leads into increased public-sector borrowing and high levels of public-sector debt where Japan is something of a leader of the pack. For the more thoughtful there is also something which was true even pre pandemic which is that economic growth was catching a bit of the Vapors even before Coivid-19 hit.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

That is an issue once the pandemic is over as we wait to see if the developed world continues to find economic growth hard to find. But for the moment let me point out another feature of Japanese life which is a contradiction to stereotypes but is so often true.

Hospitals in Japan’s second largest city of Osaka are buckling under a huge wave of new coronavirus infections, running out of beds and ventilators as exhausted doctors warn of a “system collapse”, and advise against holding the Olympics this summer. ( Reuters)

Mask wearing was not unusual when I worked out there in the 1990s so you might think they were equipped to keep things relatively under control. But as the vaccine scheme shows it has not worked out like that.

Japan opened large-scale vaccination facilities on Monday morning in Tokyo and Osaka Prefecture. Officials say they aim to inoculate Japan’s 36 million seniors by the end of July. ( NHK)

That all seems rather tardy especially for a country planning to host an Olympics in a couple of months as NHK goes on to point out.

A woman said she felt like she has had to wait a long time to get her vaccination compared to other countries, and they could have started earlier.

Also even the new effort looks to leave them short of the target above.

The Tokyo facility will administer 5,000 shots a day, while the one in Osaka will give out 2,500. The government says it hopes to double their combined capacity in the future.

Sop rather like with the nuclear power programme Japan trips up when you think it should be in an area of strength.

The Economy

Last week we were told this via Japan Today.

Japan’s economy contracted 1.3 percent in the three months to March after the government reimposed virus restrictions in major cities as infections surged, data showed Tuesday.

We can use this to look back.

Japan’s economy registered its first annual contraction since 2009 last year, reeling from the effects of the pandemic despite experiencing a smaller outbreak than many countries.

Revised figures released Tuesday showed the annual contraction was marginally better than initially estimated, at -4.7 percent, from the earlier -4.8 percent figure.

Regular readers will be aware that the 2020 fall came on the back of an economy that was already struggling because of the latest rise in the Consumption Tax.

Unlike many other places Japan may well be turning lower again this quarter.

Economists warn that the slowdown is likely to continue, with the government forced to impose a third state of emergency in several parts of the country — including economic engines Tokyo and Osaka — earlier this month.

The emergency measures are tougher than in the past, and have been extended to the end of May and expanded to several other regions in recent days.

Thus domestic demand may see its largest pandemic hit so far. There is also the debate over the Olympics which is already a year late. Will it happen? Due to the concept of face I expect Japan to do everything it can to hold it but if it cannot a lot of spending has been wasted. Then for a manufacturing economy there is this too.

Oshikubo also noted that a global semiconductor shortage caused by surging demand for chips used in personal electronic devices and modern vehicles remains a risk.

“We expect choppy waters ahead for manufacturing in the next quarter,” he warned.

Business Surveys

The IHS Markit survey on Friday was not optimistic.

Flash PMI data indicated that activity at Japanese private sector businesses saw a renewed reduction in May. Output fell at the quickest pace for four months, while the contraction in new business inflows was the fastest since February.

There was growth in manufacturing ( 53.1) but the decline in services ( 45.7) pulled the overall economy into decline. This leaves the Bank of Japan in a bit of a cleft stick because only a few days ago Governor Kuroda told us this.

Thereafter, as the impact of COVID-19 subsides, it is projected to continue growing. After having registered a significant negative figure of minus 4.6 percent for fiscal 2020, the real GDP growth rate is projected to be 4.0 percent for fiscal 2021, 2.4 percent for fiscal 2022, and 1.3 percent for fiscal 2023 in terms of the medians of the Policy Board members’ forecasts in the April 2021 Outlook Report. Compared with the previous Outlook Report released in January, the projected growth rates are higher, mainly for fiscal 2022.

So it has revised things up just as the situation gets worse.

Monetary Policy

In essence the Bank of Japan has set all official interest-rates between -0.1% overnight rate and the 0% target of yield curve control for the Japanese Government Bond market. There has been a modification because during the peal of the crisis YCC was holding bond yields up rather than pushing them down so we now have a range.

The Bank made clear that the range of fluctuations in long-term interest rates, or 10-year JGB yields, would be between around plus and minus 0.25 percent from the target level, which is set at “around zero percent.”

That was quite a defeat for the central planning philosophy because if you spend some 536,666,804,633,000 Yen on something you are planning to raise the price rather than reduce it.

Moving onto equity buying the official view is this.

The third policy action concerns ETF and J-REIT purchases. These purchases aim at exerting positive effects on economic activity and prices by lowering risk premia in the markets

If so what is going to do now the Nikkei-225 index is at these levels as today it closed at 28.364? What will be done with the 36 trillion Yen that has already been bought?


There are tow numbers which we can use to look at Japan and the first is inflation where policy is for example to raise mobile phone costs.

Compared with the previous report, the projected rate of increase in the CPI for fiscal 2021 is lower due to the effects of the reduction in mobile phone charges.( Governor Kuroda)

The aim to increase inflation to 2% per annum is never explained apart from being an international standard and has been widely ignored in Japan as inflation has been dormant during the lost decade period.

There is a counterpoint which is that Bank of Japan policy switched via QE ( now called QQE) to boosting asset prices such as equities and bonds. The latter helps oil the wheels of all the debt.

Japanese government debt rose ¥101.92 trillion ($940 billion) in fiscal 2020 to a record ¥1.2 quadrillion, showing the largest annual increase as a result of the fiscal response to the coronavirus pandemic, according to the Finance Ministry.

Marking a record high for the fifth straight year, the outstanding balance as of March 31 means that debt per capita stood at ¥9.70 million based on the estimated population of 125.41 million on April 1. ( Japan Today)

The debt burden is not one of increased interest costs as the Bank of Japan has seen to that. But the total which according to the IMF will be 256.5% of GDP this year is an issue when we note that the population and in particular the working age population is declining. Also there are areas where it plans to spend more.

Japan to end its 1% GDP cap on defence spending – “must increase our defense capabilities at a radically different pace” ( ForexLive )