Negative Interest-Rates cannot stop negative household credit growth in the UK

This morning has opened with something which feels like it is becoming a regular feature. This is the advent of negative bond yields in the UK as we become one of those countries where many said it could not happen here and well I am sure you have guessed it! The two-year bond or Gilt yield is -0.07% and the five-year is -0.03%. As well as the general significance there are particular ones. For example I use the five-year bond yield as a signal for the direction of travel for mortgage rates especially fixed-rate ones. If we look at Moneyfacts we see this.

Lloyds Bank had the lowest rate in the five year remortgage chart for those looking for a 60% LTV. Its deal offers 1.35% (2.8% APRC) fixed until 31 August 2025, which then reverts to 3.59% variable. It charges £999 in product fees and comes with the incentives of free valuation, no legal fees and £200 cashback.

A 1.35% mortgage rate for five-years is extraordinarily low for the UK and reminds me I was assured they would not go below 2%. I am sure some of you are more expert than me in deciding whether what is effectively a £799 fee is good value for free legal fees and valuation?
If we switch to the two-year yield it is particularly significant as it is an implicit effect of all the Bank of England bond or Gilt buying because it does not buy bonds which have less than three years to go. So it is a knock-on effect rather than a direct result.

QE

The total of conventional QE undertaken by the Bank of England is £616.3 billion as of the end of last week. The rate of purchases was £13.5 billion which is relevant for the May money supply numbers we will be looking at today. Looking ahead to June there has been a reduction in weekly purchases to £6.9 billion so a near halving. So as you can see there has been quite a push provided to the money supply figures. It is now slower but would previously have been considered strong itself.

Also the buying of corporate bonds which now is just below £16 billion has added to the money supply and I have something to add to this element.

NEW: The Fed has posted the 794 companies whose bonds it began purchasing earlier this month as part of its “broad market index” Six companies were 10% of the index: Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon  ( @NickTimiraos )

You may recall that the Bank of England is also buying Apple corporate bonds and I pointed out it will be competing with the US Federal Reserve to support what is on some counts the richest company in the world. Make of that what you will……

Engage Reverse Gear

This morning we have been updated on how much the UK plans to borrow.

To facilitate the government’s financing needs in the period until the end of August 2020, the UK Debt Management Office (DMO) is announcing that it is planning to raise a
minimum of £275 billion overall in the period April to August 2020.

Each sale reduces the money supply and I can recall a time when this was explicit policy and it was called Overfunding. Right now it would be a sub category of QT or Quantitative Tightening, should that ever happen.

Money Supply

We see that in a similar pattern to what we noted in the Euro area on Friday there is plenty being produced.

The amount of additional money deposited in banks and building societies by private sector companies and households rose strongly again in May (Chart 1). These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £52.0 billion in May. This followed large increases in March and April, of £67.3 billion and £37.8 billion respectively. The increase was driven by households and PNFCs, and continued to be strong relative to recent history: in the six months to February 2020, the average monthly increase was £9.3 billion.

The use of PNFCs is to try to take out the impact of money flows within the financial sector. Returning to the numbers we are seeing the consequences of the interest-rate cuts and the flip side ( the bonds are bought with newly produced money/liquidity) of the Bank of England QE I looked at earlier.

Last time around I pointed out we had seen 5% growth in short order and the pedal has continued to be pressed to the metal with a growth rate of 6.7% over the past three months. Or monthly growth rates which are higher than the annual one in May last year. All this has produced an annual growth rate of 11.3%.

Household Credit

This cratered again or to be more specific consumer credit.

Households repaid more loans from banks than they took out. A £4.6 billion net repayment of consumer credit more than offset a small increase in mortgage borrowing. Approvals for mortgages for house purchase fell further in May to 9,300.

I would not want to be the official at the Bank of England morning meeting who presented those numbers to the Governor. A period in a cake trolley free basement awaits. Indeed they may be grateful it does not have any salt mines when they got to this bit.

The extremely weak net flows of consumer credit meant that the annual growth rate was -3.0%, the weakest since the series began in 1994. Within this, the annual growth rate of credit card lending was negative for the third month running, falling to -10.7%, compared with 3.5% in February. Growth in other loans and advances remained positive, at 0.7%. But this was also weak relative to the recent past: in February, the growth rate was 6.8%.

Regular readers will recall when the Bank of England called an annual growth rate of 8.2% “weak” so I guess they will be echoing Ariane Grande.

I have no words

It seems like the air of desperation has impacted the banks too.

Effective rates on new personal loans to individuals fell 34 basis points to 5.10% in May. This was the lowest since the series began in 2016, and compares to a rate of around 7% at the start of 2020.

Mortgages

A small flicker.

On net, households borrowed an additional £1.2 billion secured on their homes. This was slightly higher than the £0.0 billion in April but weak compared to an average of £4.1 billion in the six months to February 2020. The increase on the month reflected more new borrowing by households, rather than lower repayments.

Looking ahead the picture was even worse.

The number of mortgage approvals for house purchase fell to a new series low in May, of 9,300 (Chart 5). This was, almost 90% below the February level (Chart 5) and around a third of their trough during the financial crisis in 2008.

We wait to see if the advent of lower mortgage rates and the re-opening of the economy will help here.

Comment

I am sure that many reading about the UK money supply surge will be singing along with The Beatles.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Some will go further.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go
Any jobber got the sack
Monday morning, turning back
Yellow lorry slow, nowhere to go

Do I spot a QE reference?

But oh, that magic feeling, nowhere to go
Oh, that magic feeling
Nowhere to go, nowhere to go

There will have been some sunshine at the Bank of England morning meeting.

Small and medium sized businesses drew down an extra £18.2 billion in loans from banks, on net, as their new borrowing increased sharply. Before May, the largest amount of net borrowing by SMEs was £589 million, in September 2016. The strong flow in May led to a sharp increase in the annual growth rate, to 11.8%.

Of course it was nothing to do with them but that seldom bothers a central bankers these days. This next bit might need hiding in the smallest print they can find though.

Podcast

 

UK consumer credit collapses as the money supply soars

As we peruse the data for the impact of all the Bank of England actions in this pandemic we have also been updated on its main priority. From the Nationwide Building Society.

“UK house prices fell by 1.7% over the month in May, after
taking account of seasonal effects – this is the largest
monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8%, from 3.7% in April.”

According to them things had been going really rather well before the May reverse.

“In the opening months of 2020, before the pandemic struck
the UK, the housing market had been steadily gathering
momentum. Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop
following the general election.”

Personally I am rather dubious about the April number but we do have a large fall for May and also something of a critique for the suspended official index from the Office for National Statistics.

Mortgage activity has also declined sharply. Nevertheless,
our ability to generate the house price index has not been
impacted to date, as sample sizes have remained sufficiently large (and representative) to generate robust results.

Rents

Perhaps such news is all too much for the boomers as I note the BBC reporting this today.

Lockdown break-ups, job losses and urgent relocations are thought to have led to a surge in the rental sector.

Demand for lettings in Great Britain is up by 22% compared to last year, according to property giant Rightmove.

Experts say the lifting of lockdown restrictions has released “two months of pent-up tension” in the market.

The supply of new rents is not keeping up with demand, however, prompting fears the surge will push up costs and leave some struggling to find homes.

The article tries to give the impression that rents are rising but provides no evidence for this at all, as the data set only has demand. It seems to lack a mention of the numbers in the data set which showed larger demand declines in the pandemic. We seem back to the get in now before rents boom message that is so familiar as the media parrots what the industry wants.

“I think we were lucky really because we got in there before demand boomed.”

On a personal level some people were viewing in my block yesterday. Fair play to the viewers who put on masks, but sadly the estate agent who is more likely to spread the virus did not bother with any PPE.

Consumer Credit

Even in the hot summer weather we are seeing the spine of the Monetary Policy Committee will have seen a sudden chill as these numbers came in.

New gross borrowing fell to £11.8 billion in April, roughly half its February level. Repayments on consumer borrowing have also fallen sharply, by 19% since February, reflecting payment holidays. On net, the larger fall in gross borrowing meant people repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record repayment (Chart 3). The extremely weak net flows of consumer credit meant that the annual growth rate fell below zero in April, to -0.4%, the weakest since August 2012.

What is happening here is that each month there is a large amount of new borrowing but also repayments and the usual situation is that we see net borrowing and in recent years lots of it. In April the amount of new borrowing fell and for once the use of the word collapse is appropriate whereas the level of repayments fell by much less. Thus the net amount swung by as much as I can ever recall.

In terms of the detail the main player was credit card borrowing.

The majority (£5.0 billion) of net consumer credit repayments were on credit cards, while £2.4 billion of other loans were also repaid in April. The annual growth rate of credit card lending was negative for the second month running, falling to -7.8%, compared with 3.5% in February before borrowing fell. Growth in other loans and advances remained positive, at 3.1%.

Mortgages

There was a similar pattern to be found here although in this instance it was not enough to turn the net figure negative. Also the bit I have emphasised is a signal of the financial distress I have both feared and expected.

Lending has also fallen sharply. Gross (new) mortgage borrowing fell to £14.4 billion, 38% lower than in February (Chart 5). Repayments on mortgage lending also fell sharply, to £13.9 billion, 26% lower than in February. This reflects a sharp fall in full repayments of loans, as well as the effect of payment holidays. The sharper fall in gross lending than repayments means that net mortgage borrowing fell, and was only £0.3 billion in April compared to an increase of £4.3 billion in February. This was the lowest net increase since December 2011.

One area that I do expect to pick up is this.

Approvals for remortgage (which include remortgaging with a different lender only) have fallen by less, to 34,400, 34% lower than in February.

With my indicator for fixed mortgage interest-rates ( the five-year Gilt yield) so low and effectively around 0% I expect some cheaper mortgage rates and hence more remortgaging, for those that can. As to mortgage rates they did this.

The effective interest rate paid on the stock of floating-rate mortgages fell 46 basis points, to 2.39%, the lowest rate since this series began in 2016; and the rate on new floating-rate loans fell 35 basis points to 1.48%.

They do not often tell us the mortgage rates but I guess they wanted to emphasise their own actions.

The rate paid by individuals on floating-rate mortgage borrowing fell a little further in April, however, as the MPC’s March Bank Rate cuts continued to pass through.

Business Lending

You might like to recall as you read the bit below that all of the credit easing since the summer of 2012 has been to boost small business lending.

Private sector businesses of all sizes borrowed little extra from banks in April. Small and medium sized businesses drew down an extra £0.3billion in loans from banks, on net, a similar amount as in March. The annual growth rate of borrowing by SMEs was 1.2%, in line with the growth rate since mid 2019.

For newer the readers the central banking game is to claim you are boosting lending to SMEs and then express surprise when it is mortgage lending and unsecured credit to consumers that rises and soars respectively.

The numbers below are mostly because many businesses have been desperate for cash.

But strength in borrowing by the public administration and defence industry meant total borrowing by large businesses was £12.9 billion in April. While this total is very strong by historical standards, it is down from £32.4 billion in March. The annual growth rate of borrowing by all large businesses increased to 15.4%, much stronger than the growth rate of around 5% in late 2019.

There will be quite a complicated mixture there as we no note lower and sometime zero sales colliding with many expenses continuing.

This is an ongoing problem where big businesses get help. As you can see they can access bank loans and the various Bank of England schemes are designed for them too.

 In April, firms raised £16.1 billion from financial markets, on net, the highest amount raised since June 2009 and significantly stronger than the previous six month average of £23 million. Within this, firms issued £7.7 billion of bonds, £7.0 billion of commercial paper (including funds raised through the Covid Corporate Financing Facility), and £1.4 billion of equity.

It is not easy as for obvious reasons a central bank can help a large business in ways that it cannot help a corner shop or one (wo)man band but the truth is that they also get a bit lazy and could try much harder.

Comment

I have held back the money supply data for this section and here it is.

These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £37.3 billion in April. The strength was driven by households and PNFCs. The increase was smaller than in March, when money increased by £67.3 billion.

An interesting decline in the monthly number but the main message here is the £104.6 billion in only two months which compares to a total of £2364.4 billion. So a bit short of 5% in only 2 months! The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears. Oh and as to how this is created well some £13.5 billion of QE a week sure helps.

One other factor will be that these aggregate numbers will hide very different individual and group impacts. For example some with mortgages will be in financial distress whereas others will be using lower rates to increase repayments. The same will be true of businesses with sadly as I have explained above smaller ones usually getting the thin end of the wedge. These breakdowns are as important as the aggregate data but often get ignored.

UK Money Supply surges as Unsecured Credit Collapses

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

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

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

Money Supply

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

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

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

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

Or more prosaically,

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

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

Consumer Credit

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

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

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

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

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

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

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

Business Lending

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

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

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

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

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

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

Mortgages

We open with a bit of all our yesterdays.

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

Then we get a bit more with the current reality.

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

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

Comment

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

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

Really?

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

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

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

A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

What policy action can we expect from the Bank of England?

As to world faces up to the economic effects of the Corona Virus pandemic there is a lot to think about for the Bank of England. Yesterday it put out an emergency statement in an attempt to calm markets and today it will already have noted that other central banks have pulled the interest-rate trigger.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. ( Reserve Bank of Australia).

There are various perspectives on this of which the first is that it has been quite some time since the official interest-rate that has been lower than in the UK. Next comes the fact that the RBA has been cutting interest-rates on something of a tear as there were 3 others last year. As we see so often, the attempt at a pause or delay did not last long, and we end up with yet another record low for interest-rates. Indeed the monetary policy pedal is being pressed ever closer to the metal.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years.

Also in the queue was a neighbour of Australia.

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.75 percent and 2.25 percent, respectively.

So there were two interest-rate cuts overnight meaning that there have now been 744 in the credit crunch era and I have to add so far as we could see more later today. The problem of course is that in the current situation the words of Newt in the film Aliens come to mind.

It wont make any difference

It seems that those two central banks were unwilling to wait for the G7 statement later and frankly looking at it I can see why.

– G7 Now Drafting Statement On Coronavirus Response For Finance Leaders To Issue Tuesday Or Wednesday – Statement As Of Now Does Not Include Specific Language Calling For Fresh Fiscal Spending Or Coordinated Interest Rate Cuts By Central Banks – RTRS Citing G7 Source ( @LiveSquawk )

The truth is G7 are no doubt flying a cut to see how little they can get away with as monetary ammunition is low and fiscal policy takes quite some time to work. A point many seem to have forgotten in the melee.

The UK Economy

The irony of the present situation is that the UK economy was recovering before this phase.

Manufacturing output increased at the fastest pace since
April 2019, as growth strengthened in both the consumer
and intermediate goods sectors. In contrast, the downturn
at investment goods producers continued. The main factor
underlying output growth was improved intakes of new
work. Business optimism also strengthened, hitting a nine month high, reflecting planned new investment, product
launches, improved market conditions and a more settled
political outlook. ( IHS Markit )

This morning that was added to by this.

UK construction companies signalled a return to business
activity growth during February, following a nine-month
period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a postelection improvement in business confidence and pent-up demand for new projects. ( IHS Markit)

If there is a catch it is that we have seen the Markit PMI methodology hit trouble recently in the German manufacturing sector so the importance of these numbers needs to be downgraded again.

Monetary Conditions

As you can see the situation looks strong here too as this from the Bank of England yesterday shows.

Mortgage approvals for house purchase rose to 70,900, the highest since February 2016.

The annual growth rate of consumer credit remained at 6.1% in January, stabilising after the downward trend seen over past three years.

UK businesses made net repayments of £0.4 billion of finance in January, driven by net repayments of loans.

Please make note of that as I will return to it later. Now let us take a look starting with the central banking priority.

Mortgage approvals for house purchase (an indicator for future lending) rose to 70,900 in January, 4.4% higher than in December, and the highest since February 2016. This takes the series above the very narrow range seen over past few years.

Actual net mortgage lending at £4 billion is a lagging indicator so the Bank of England will be expecting this to pick up especially if we note current conditions. This is because the five-year Gilt yield has fallen to 0.3%. Now conditions are volatile right now but if it stays down here we can expect even lower mortgage rates providing yet another boost for the housing market.

Next we move to the fastest growing area of the economy.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

As you can see the slowing has stopped and been replaced by this.

These growth rates represent a £1.2 billion flow of consumer credit in January, in line with the £1.1 billion average seen since July 2018.

Broad money growth has been picking up too since later last spring and is now at 4.3%.

Total money holdings in January rose by £9.4 billion, primarily driven by a £4.2 billion increase in NIOFC’s money holding.

The amount of money held by households rose by £2.8 billion in January, compared to £3.3 billion in December. The amount of money held by PNFCs also rose by £2.3 billion.

Comment

The numbers above link with this new plan from the ECB.

Measures being considered by the ECB include a targeted longer-term refinancing operation directed at small and medium-sized firms, which could be hardest hit by a virus-related downturn, sources familiar with the discussion told Reuters. ( City-AM)

You see when the Bank of England did this back in 2012 with the Funding for Lending Scheme it boosted mortgage lending and house prices. Where business lending did this.

UK businesses repaid £4.1 billion of bank loans in January. This predominantly reflected higher repayments. These weaker flows resulted in a fall in the annual growth rate of bank lending to 0.8%, the weakest since July 2018. Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

I think that over 7 years is enough time to judge a policy and we can see that like elsewhere ( Japan) such schemes end up boosting the housing market.

It also true that the Bank of England has a Governor Mark Carney with a fortnight left. But he has been speaking in Parliament today.

BANK OF ENGLAND’S CARNEY SAYS SHOULD EXPECT A RESPONSE THAT HAS A MIX OF FISCAL AND CENTRAL BANK ELEMENTS

BANK OF ENGLAND’S CARNEY SAYS EXPECT POWERFUL AND TIMELY GLOBAL ECONOMIC RESPONSE TO CORONAVIRUS ( @PrispusIQ)

That sounds like a lot of hot air which of course is an irony as he moves onto the climate change issue. I would imagine that he cannot wait to get away and leave his successor to face the problems created by him and his central planning cohorts and colleagues.

His successor is no doubt hoping to reward those who appointed him with an interest-rate cut just like in Yes Prime Minister.