Mark Carney is back making promises about interest-rates

Yesterday the Governor of the Bank of England visited the Great Exhibition of the North and went to Newcastle but sadly without any coal. As usual he was unable to admit his own role in events when they have gone badly and this was illustrated by the sentence below.

We meet today after the first decade of falling real incomes in the UK since the middle of the 19th century.

Perhaps he had written his speech before the Office of National Statistics told these specifics on Wednesday but he should have been aware of the overall picture. The emphasis is mine.

Both cash basis and national accounts real household disposable income (RHDI) declined for the second successive year in 2017. This was due largely to the impact of inflation on gross disposable household income (GDHI),

The issue here is that the Bank Rate cut and Sledgehammer QE sent the UK Pound £ lower after the EU Leave vote. Just for clarity it would have fallen anyway just not by so much and certainly not below US $1.20, After all we have seen it above US $1.30 now and if you look back you see that it has in general two stages. The first which was down accompanied the period the Bank of England promised more easing – it is easy to forget now that they promised to cut Bank Rate to 0.1% in November 2016 before events made it too embarrassing to carry it through –  and then once that stopped stability and then a rise. With a lag inflation followed this trend but with a reverse pattern. So if we return to the data above we now see this.

On a quarter on same quarter a year ago basis, both measures of RHDI increased in Quarter 1 2018. Cash RHDI increased by 2.4% and national accounts RHDI grew by 2%;

Now the inflation effect has faded the numbers are growing again. Again not all of the effect is due to it dropping as stronger employment has helped but it is in there. As a final point these numbers make me smile as I recall some of you being kind enough to point out my role in us finally getting numbers without the fantasy elements.

This bulletin provides Experimental Statistics on the impact of removing “imputed” transactions from real household disposable income (RHDI).

Forward Guidance

It would not be a Mark Carney speech if he did not reverse what he told us last time as he racks up the U-Turns. First he did some cheerleading for himself.

That approach has worked . Employment is at a record high. Import price inflation is fading. Real
wages are rising.

This of course relies on the power of a 0.25% Bank Rate cut ( plus more QE) but sadly nobody asked why if that is so powerful why the previous 4% or so of cuts did not put the economy through the roof? Also his policies made imported inflation worse and real wages are only rising if you choose a favourable inflation measure.

Also we got what in gardening terms is a hardy perennial.

Now, with the excess supply in the economy virtually used up

It has been about to be used up for all of his term! Remember when an unemployment rate of 7% was a sign of it? Well it is 4.2% now.  But in spite of the obvious persistent failures it would appear that it is deja vu allover again.

The UK labour market has remained strong, and there is widespread evidence that slack is
largely used up.

Next we get this

Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first
quarter was largely due to the weather, not the economic climate.

And this.

A number of indicators of household
spending and sentiment have bounced back strongly from what increasingly appears to have been erratic
weakness in Q1………….Headline
inflation is still expected to rise in the short-term because of higher energy prices.

Leads to the equivalent of something of a mouth full and the emphasis is mine.

As the MPC has stressed, were the economy to develop broadly in line with the May Inflation Report
projections – with demand growth exceeding the 1½% estimated rate of supply growth leading to a small
margin of excess demand emerging by early 2020 and domestic inflationary pressures continuing to build
gradually to rates consistent with the 2% target – an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target at a conventional horizon.

For newer readers unaware of how he earned the nickname the unreliable boyfriend let me take you back four years and a month to his Mansion House speech.

The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path
thereafter – that is, the degree and pace of increases after they start. In particular, we expect that eventual
increases in Bank Rate will be gradual and limited.

Well he was right about the limited bit as it is still where it was then at the “emergency” level of 0.5%. Actually of course he was believed to have been much more specific at the time.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

The next day saw quite a scramble as markets adjusted to what they believed in central banker speak was as near to a promise as they would get. You may not be bothered too much about financial traders ( like me) but this had real world implications as for example people took out fixed-rate mortgages and then found the next move was in fact a cut.

Yet some saw this as a sign as this from Joel Hills of ITV indicates.

Mark Carney signalling that, despite all the uncertainty, “gradual and limited” interest rate rises are looming. Market is betting that Bank of England will probably increase Bank Rate in August.

Just like in May when they lost their bets as part of a now long-running series. The foreign exchange markets have learnt their lesson after receiving some burnt fingers in the past and responded little. Perhaps they focused on this bit.

Pay and domestic cost growth have continued to firm broadly as expected.

Now if we start in December the official series for total pay growth has gone 3.1%, 2.8%, 2.6%,2.5% and then 2.5% in April which simply is not “firm” at all. Of course central bankers love to cherry pick but sadly the season for cherries has not been kind here either. If we move to private-sector regular pay as guided we see on the same timescale 2.9%, 3%, 2.8%, 3.2% but then a rather ugly 2.5% in April. There are few excuses here as they have excluded bonuses which are often high in April.


We have been here so may times now with the unreliable boyfriend who just cannot commit to a Bank Rate rise. Each time he echoes Carly Rae Jepson and ” really really really really really really ” wants to but there is then a slip between cup and lip. If we look back to May which regular readers will recall had been described by the Financial Times as an example of forward guidance for an interest-rate rise the feet got cold. If they do so again will we see wage growth as the excuse? We do not know this month’s numbers but as we stand they looked better back then than now.

If we look over the Atlantic we see a different story of a central bank raising interest-rates into an apparently strong economy and promising more. We are of course between the US and Euro area in economic terms but in my opinion it would have been much better if we had backed up the rhetoric and now had interest-rates of say 1.25%.or 1.5%. If we cannot take that then what has the claimed recover been worth.

Considering all the broken promises and to coin a phrase four years of hurt this is really rather breathtaking,




UK rents are going to surge. Really?

The issue of rents is something which has two main drivers to attract our attention. The main one is that whilst the UK often likes to think of itself as a nation of home owners the fact is that more and more people are renting this days. Within renting there has also been a shift as fewer council houses (for foreign readers UK local authorities used to have a largish stock of housing but have much less now) are available and more people rent privately. There is of course something of an irony in the fact that in this respect we are becoming more like our European neighbours. Also there is the issue that our establishment and statisticians are trying to push a measure of inflation (CPIH) which takes owner occupied houses and imagines they are rented out and then puts that in the inflation numbers. Of course they also use such numbers to impute a rent for the income version of the GDP numbers. What could go wrong? Actually quite a lot if you go to the Royal Statistical Society to debate such issues as I do.

What is going to happen to rents?

The Financial Times has published some analysis today although you may note the last 4 words of the sentence below.

Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.

Okay by how much?

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

We then get a reminder of what is driving this according to Savills.

Efforts to damp the buy-to-let market, including a stamp duty surcharge and plans to limit tax relief on mortgage interest payments, are pushing investors towards “higher yielding, lower demand markets”, meaning the areas of highest demand, such as London, face tightening supply. Yields in cheaper areas of the country tend to be higher.

Here are their estimates for the numbers.

Savills said the number of mortgaged buy-to-let investors purchasing new homes was set to drop by a third to 80,000 by 2018, recovering slightly to 90,000 by 2021. Cash buyers, many of whom are investors, will drop by 18 per cent by 2018.

Ah “investors” some would call that rentiers. Also it would appear that estate agents in general are keen to put rising rents in our minds.

JLL, another estate agency group, predicted a 17.6 per cent increase across the UK by 2021, with London rents rising 19.9 per cent, far outstripping predicted rates of inflation.

Let me for the moment simply point out the tactical issue that if those planning to rent property are switching out of London then presumably that will put downwards pressure on rents elsewhere as the FT has missed this.

House Price Stagnation

As we mull the obvious moral hazard in the analysis above we might advance expecting house price rises to be forecast to match the rent rises.

Savills said prices would be flat in 2017 in the capital and elsewhere…….“We think sentiment will be affected as there is more of a realisation of what Brexit means for earnings, for the economy and for employment,” Mr Cook said.

Mr.Cook has just provided a critique of his own rent forecasts as of course the trends for earnings and employment will affect them too. Also there has to be some jam tomorrow to go with today’s dry toast.

Savills predicted a year of steeper growth — 5.5 per cent — in 2019 as uncertainty around the Brexit negotiation process abates, bringing total UK house price growth to 13 per cent in the next five years.

Ah so just like the Bank of England perhaps! If the numbers have gone against you claim it back in 2019 and then hope that when we get to 2019 everyone will have forgotten it.

What is happening to rents?

Last week we were updated on the official data.

Private rental prices paid by tenants in Great Britain rose by 2.3% in the 12 months to September 2016; this is unchanged compared with the year to August 2016.

It was kind of the ONS to make my case that this is flawed measure for inflation for me.

residential house price growth in Great Britain has typically been stronger than rental price growth, with an average 12-month rate of house price inflation between January 2014 and August 2016 of 7.3%, compared with 2.1% for rental prices.

But if we go back to rents there is a clear problem in the forecasts made today. If you look at the pattern of rental growth it follows the improvement in the UK economy with a lag ( of over a year which is another reason why it is a bad inflation measure) which means that it looks to be driven by improving incomes and probably real incomes rather than the underlying economy. Thus if you expect real income growth to fade (pretty much nailed on with likely inflation) or fall which seems likely then you have a lot of explaining to do if you think rents will rise. If 2017 turns into a difficult year with higher inflation then 2019 would be a rough year for rents if past patterns hold. Or up seems to be the new down yet again.

At a time like that renters are more likely to be singing along with Lunchmoney Lewis.

I got bills I gotta pay
So I’m gon’ work, work, work every day
I got mouths I gotta feed,
So I’m gon’ make sure everybody eats
I got bills!

As a technical point it is only in England that rents are rising.

Private rental prices grew by 2.5% in England, fell by 0.1% in Scotland and grew by 0.1% in Wales in the 12 months to September 2016.

Actually if we move to Mortgage Introducer the situation for rents in London seems to be seeing ch-ch-changes.

London rents fell by -0.11% in October, with major falls occurring in Westminster (-1.86%), Kensington and Chelsea (-1.81%), Richmond upon Thames (-0.99%) and Camden (-0.93%).

Actually the index here showed that there are very different situations across Scotland.

Aberdeen (-13.22%) and Aberdeenshire (-9.03%) saw the greatest rental falls  as they were both hit by the dramatic fall in oil prices since mid-2014.

But Edinburgh City rose by 5.63%.


There is a lot at play here. Sadly one of them is the increasing way that the media reproduce what are in effect not far off press releases and call it journalism, As we look forwards the UK is so far doing okay for economic growth (0.4% to 0.5% per quarter on the evidence so far) but I expect a rise in inflation in 2017 which is more likely to subtract from that via its effect on real incomes than add to it. We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Also an argument in favour of rental yields rising needs to address why in an era of negative interest-rates and bond yields they should be exempt? Oh and as to lower supply of houses for rent well the FT did not seem to think so only three weeks or so ago.

Rightmove, the property website, found rental listings had risen by 6 per cent in the three months to the end of September compared to the same period last year. The rise in supply was even more pronounced in London, where it climbed 15 per cent year on year.

These issues have increasing importance as the phrase “Generation Rent” implies as I expect millennials and those younger to increasingly rent rather than own things. This is an example of back to the future or perhaps a life cycle as I recall my grandparents and for a while my parents renting items such as TVs and later video recorders from places such as Radio Rentals. We do however have a new name for it as renting comes under the sharing economy does it not?

Meet the new boss,same as the old boss?