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.

France looks to be falling into recession as the economy shrinks

Yesterday brought us an example of tempting fate as we were told this by the Governor of the Bank of France.


That struck a chord after the news from France on Friday. The statistics office told us this.

In October 2022, production fell again over one month in manufacturing industry (-2.0% after -0.5%) as in industry as a whole (-2.6% after -0.9 %).

So we have a picture of a decline at the end of the third quarter which accelerated in October and as economic growth back then was only 0.2% there is an increasing possibility that the economy is declining. Also the falls were widespread.

In October 2022, production fell again in the extractive industries, energy, water (-5.6% after -2.8%) and “other industrial products” (-1.6% after -0.2%) . It fell back into capital goods (-3.5%, after +0.7%). It fell sharply in coking-refining (-46.3% after -6.5%) due to the strike movement which affected the refineries. Production fell again in transport equipment (-1.9% after -3.2%): it fell in automobiles (-5.8%, as in September) but rebounded in other transport equipment ( +1.3% after -1.0%).

We can reduce the decline a bit to allow for the strike in the coking industry. However the fall in the energy category reminds us of the struggles that Edf has had this year with France’s nuclear output. That looks to be in play this morning with the UK exporting some 2.5 GW of electricity to help out. The decline in this area looks to havebeen added to by the services sector last month.

The seasonally adjusted S&P Global France Services PMI®
Business Activity Index fell beneath the vital 50.0 threshold
in November for the first time since March 2021, indicating
a decrease in activity levels across the French service
sector. At 49.3, this was down from 51.7 in October, ending a 19-month sequence of continued expansion. ( S&P PMI)

The services fall is marginal but we now that production is struggling so we are now looking like the decline is on. That is also the impression given by S&P Ratings on Friday night.

We reduced our 2023 GDP growth forecast for France to 0.2% from 1.7% in our July 2022 review and increased our budget deficit forecast to 5.4% of GDP from 4.0%, with the latter averaging 4.9% over 2023-2025 versus 3.6%, and general government debt rising to 112% of GDP by 2025.

I will return to the public finances issue but if we stick to the growth point the significant factor here is the 1.5% fall in the GDP forecast in a mere 5 months or so. As their forecasts are not accurate to 0.2% they are saying there will be no growth in 2023. That is significant because they were very unlikely to switch to predicting a recession as that would embarrass their previous forecast too much. Plus I note that they think there will be the wrong sort of Euro area solidarity.

The economic slowdown in Europe will constrain French growth.

This morning the wider PMI survey gave us an update on that.

Output levels across the euro area shrank once again in
November, extending the downturn into a fifth month.
Although the rate of contraction eased for the first time over
this sequence due to a slower fall in manufacturing
production, this masked an accelerated decline in the
eurozone’s dominant services sector. Excluding months hit
by COVID-19 restrictions, November’s contraction was the
second-sharpest since May 2013.

According to it France at 48.7 is doing relatively well compared to the Euro area 47.8 although another way of putting it is that it is in the group of countries doing better than Germany which is particularly weak.


This is a developing issue as I looked at last Wednesday. Today has its issues for France because someone at Edf got their calculations wrong.

On a highly observed day EDF Trading accidentally sold 1500MW too much on EpexSpot day-ahead auction ==> price is artificially too low. Let’s see what happens on intraday market ( @Emericdevigan )

That is why France is taking 2.5 GW from us. The issue is added to by it getting colder and also that systems are more stressed with less margin. The impact so far is this according to Emeric.

Intraday markets up around 50€/MWh this morning vs day-ahead clearing price. Day is not over, and for once real-time demand is above forecasts…

On a broader scope I see him noting some research pointing out the issue with French nuclear in that a capacity of 61 GW has faded into an expected 40 GW. This led on Thursday to plans reported by RFL.

The  French government is putting a plan in place to deal with the looming energy crisis as fears rise of electricity power cuts. A directive will be sent to regional police chiefs to anticipate scheduled power cuts, which could affect 60 percent of the population in the  worst-case scenario.

In terms of the nuclear fleet the use of the word temporary already has echoes of what happened with inflation.

“Historically, France is an exporter because of its very large nuclear fleet, however, now it turns out that it has temporary difficulties … (which) will be resolved but it will take a few years,” he told France Info on Thursday.

The issue with the import numbers below is that France will be hoping for power from the UK via the interconnectors whilst the UK is hoping for power from France. 

He said France would turn to European neighbours to import up to 15 GW, which represents “a useful amount” to cope with a peak in electricity consumption of around 90 GW, and “contributes to being able to avoid cuts”

She will also have to look elsewhere as due to the fire at one the present capacity is 3.5 GW. It will require some luck for cold days in France to be windy ones in the UK so we can help out.

Switching back to the impact on industry I note this in the article.

Electricity consumption in France fell by 6.7 percent last week compared to the average for previous years (2014-2019), a drop “largely concentrated in the industrial sector”, according to RTE’s latest report on Tuesday.

A clear hint of output and it also raises a wry smile as we used to look at electricity production in China as a guide to the economy and it seems the worm has turned.

I am not sure this about gas is the triumph the Financial Times is trying to present it as either.

“Industry is proportionally driving the biggest reductions in gas consumption, and this is entirely the result of clear market pricing,” said Tom Marzec-Manser, lead European gas analyst at ICIS. The high gas price has “disincentivised” use, he added.


To the slowing situation we can return to the the Governor of the Bank of France.

The ECB should raise interest rates by 50 basis points this month to tame surging consumer prices, said Governing Council member Francois Villeroy de Galhau. ( Bloomberg)

So they interest-rates will be 2% assuming he gets his way making them 2.5% higher this year. Plus he wants more.

expects rate hikes will continue after that meeting, and says he is unable to forecast when they would stop ( Forexlive)


Everything seems to be heading south at once with the economy struggling. I have made the point many times that central banks are now increasing interest-rates out of phase and the ECB has been one of the worst. The delaying means that the impact of the rises is arriving as the economy was weak anyway in the exact opposite of what monetary policy is supposed to do.

Looking at France’s situation there is also one with the public finances which is linked to inflation. She chose to switch some of her inflation to the public finances ( and some of it to Edf that has also hit the public finances). If we return to the S&P negative outlook it is here.

France’s headline inflation remains the lowest in the euro area, partly thanks to government support measures. These include caps on gas and electricity price increases and fuel rebates, which should help reduce headline inflation more than 2 percentage points (pp) on average in 2022, according to the government. The government expects an extension to caps on gas and electricity prices will reduce headline inflation more than 3 pp in 2023.

That is how France has an inflation rate of 7.1% which is relatively low. But it impacts here.

We now expect the budget deficit to average 4.9% over 2023-2025, versus 3.6% previously, with general government debt to GDP rising over our forecast horizon.

That will impact on real wages which on pre tax terms will look relatively good until taxes rise to pay for this.

As to the debt situation there are risks as the numbers rise but it looks contained for now.

Nevertheless, because the average maturity of French government debt is long dated (above 8.5 years) and the average interest rate on outstanding debt is low (above 1.5%), a pass through of market rates into the cost of total debt would likely be very gradual. ( S&P)

A possible X-Factor is this.


The ECB selling French government bonds will add more to the mix, if it happens/


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 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. (

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…


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

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

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

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

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

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

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

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

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

Oh and I did say they are nervous.

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

Problems with inflation

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

How broad-based is the increase in UK inflation?

CPI inflation

Thank you for the post which is interesting.


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


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


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


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


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


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


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


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


Thank you


Shaun Richards

Money Supply Surges

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

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

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

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

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


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

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

But there was a warning signal of changes to come.

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

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

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

Consumer Credit

This headed in the other direction in September.

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

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

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

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

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

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


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

Upside downBoy, you turn meInside outAnd round and round

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

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







The UK does a fiscal U-Turn and I expect a monetary one too

Last week was en extraordinary one for the UK which ended with the new Chancellor of the Exchequer Kwasi Kwarteng being sent to spend more time with the family he hasn’t got. So we got a new one Jeremy Hunt who probably could not believe his luck. The appointment came with something of an early fiscal U-Turn.

And by any measure, Prime Minister Liz Truss’ decision to scrap the cancellation of her former leadership rival Rishi Sunak’s rise on corporation tax is one of the biggest fiscal U-turns on record.

Over five years, it is worth £67bn, the biggest single revenue measure of the mini-budget. ( BBC )

So we have already seen quite a change and over the weekend it was a case of “More! More! More!” as Andrea True Connection would say.

Instead Hunt, installed as chancellor last Friday, is expected to issue a statement on new tax and spending measures at 11am before making a Commons statement this afternoon. ( Financial Times)

We can also review things via some media number-crunching as the £67 billion of the BBC above becomes this in the Financial Times or FT.

Truss has already reversed £20bn of tax cuts since the disastrous “mini” Budget on September 23,

I prefer the FT version as these moves are for now and no-one has any idea of the situation next month let alone in a year or two. Actually there does not seem to be much detail on what is expected today.

A cut in income tax of one percentage point next April, costing about £5bn, is expected to be put on hold, but that is only expected to represent the start of another series of U-turns. (FT)

Which are?

A £13bn cut in national insurance rates, contained in the mini-Budget and supported by Labour, is expected to survive, but Hunt has said that all other measures in the ill-fated “mini” Budget were on the table. ( FT)

So they are not sure so we are left with the rhetoric of the Institute for Fiscal Studies for the FT to cling to.

The Institute for Fiscal Studies has said a £60bn fiscal tightening will be required to make the sums add up, implying that Hunt will have to go much further in reversing tax cuts, raising taxes and cutting spending.

To be fair to the IFS they did point out that one needs to take great care with these sorts of forecasts.

There is huge uncertainty around the exact magnitude, but under a central forecast in 2026–27 we expect borrowing of £103 billion, which would be £71 billion higher than forecast in March. Much of this increase is uncertain

I have less faith in them here because with inflation so strong combined with the uncertain economic position right now combined with the fact that UK bond yields have been very volatile means this may well be next week’s if not tomorrow’s chip paper.

We forecast that spending on debt interest will be £103 billion in 2023–24, double the £51 billion forecast by the OBR in March and which was already an upwards revision on the £39 billion the OBR forecast in October 2021.

Thus this becomes embarrassing in terms of meaning anything.

 But even in 2026–27 we forecast that debt interest spending will be £66 billion, some £18 billion higher than forecast by the OBR in March, £26 billion more than forecast in October 2021 and £9 billion more than was spent in 2021–22, as a result of higher interest rates and a higher level of accumulated debt.

We do eventually get to the £60 billion or so.

Under Citi’s central forecast, it would require a fiscal tightening of £62 billion in 2026–27 to stabilise debt as a fraction of national income – so even reversing all of the permanent tax cuts in Mr Kwarteng’s ‘mini-Budget’ would not be enough

But then a simple sentence provides where I have been heading. A small change in economic growth makes an enormous difference.

Higher growth would help – but even if growth turned out to be 0.25 percentage points a year stronger than Citi expects, a fiscal tightening of £41 billion would be required to stabilise debt.

There is a real irony there because we see that a relatively small amount of economic growth would would wipe out the “black hole”. Of course the original mini-Budget was supposed to achieve that although we have little idea if it would have worked. Also to add another layer to the issue which is that we have struggled for some time to get much economic growth at all. So we end up with a multi-layed level of uncertainty replacing the “£62 billion”.

The Bank of England

The Governor Andrew Bailey has avoided some of the London storm by staying in Washington. Although of course he created his own storm last Tuesday night. He spoke over the weekend and let us start with inflation.

In early August, we estimated that the direct effects of higher energy prices – that’s not including indirect effects – would contribute around 6½ percentage points to inflation towards the end of this year. Our assessment was that inflation would peak at around 13%, and then come down sharply – other things equal – to the 2% target in two years’ time, before falling further to 0.8% in three years.

As you can see he is shuffling away the blame for half of the rise in inflation. Unfortunately for him we can look up what he told us in August 2021.

We expect inflation to fall back, reaching our target in around two years’ time.

How is that going? More specifically he thought it would peak at 4%. Now some of the energy price rise is due to the Ukraine war but he is ignoring the fact that energy price rises were already happening. So let us reduce his “swerve” from 6 1/2% to 4% meaning he has had a disaster.

The main thrust of his speech was to be found here.

We will not hesitate to raise interest rates to meet the inflation target. And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.

This has been widely reported with one missing bit.We have heard all this before from him. If we look back to September last year he ramped up the prospects for an interest-rate rise in a speech with “Hard Yards” in the title but then did not act in November and made the smallest rise ever in December ( 0.15%). Meanwhile the inflation fires were burning.


There is a lot of ground we have covered to today. But let me return to fiscal policy and the point that it is in the end economic growth which drives the figures. Next up is the fact that many who were promoting fiscal policy now seemed to have swerved to a form of austerity with no explanation of why?! The reality is that they are shuffling away from the fact that the policies they were cheerleading for threw petrol on inflationary fires.

If we return to the Bank of England there is another apparent irony in that in my view the same interest-rate increase they failed to provide last time (0.75%) is back on the menu. Also they have a fortnight to scrap their plans for £80 billion of bond sales. On the more positive front the £19.3 billion of bond purchases do seem to have helped calm things although the road to fewer bond holdings has in fact increased them.

Oh and as someone who is careful with numbers it is hard not not shake my head at all the reports on social media that the Bank of England spent £65 billion and even worse that it has lost it.