The European Investment Bank and the UK’s missing £7.6 billion

The European Investment Bank is a major part of the European Union’s and also the Euro area’s infrastructure. Yet so many have not heard of it which I plan to begin to correct today. But there are also big issues and a possible expensive error on the way as the UK’s relationship with it gets set to change assuming that the UK does carry out some form of Brexit. As we stand the UK is one of the four largest shareholders ( along with France,Germany and Italy) with a shareholding of 16.1% or 39.2 billions Euros according to the EIB.

What is the EIB?

The first impression is that it is very large as we look at the scale of its operations.

Since its establishment in 1958 the EU bank has invested over a trillion euros.

Even in these inflated times that is quite a lot and it is expanding fast.

Lending: From ECU 10bn in 1988, our annual lending neared EUR 45bn in the mid-2000s before jumping to EUR 79bn in 2009 as a temporary response to the crisis. It was EUR 55.63bn in 2018.

In terms of its own operations it has been a win for Luxembourg. Quite a win really when you note its very small shareholding in the venture.

Our HQ: Founded in Brussels in 1958 as the Treaty of Rome comes into force, we moved to Luxembourg in 1968. We relocated to our current site in 1980 with a major new building extension completed in 2008.

As to its lending this is described here.

We support projects that make a significant contribution to sustainable growth and employment in Europe and beyond. Our activities focus on four priority areas:


Innovation and skills are key ingredients for ensuring sustainable growth and creating high-value jobs.


Small and medium-sized enterprises (SMEs) are important drivers of growth, innovation and employment in Europe…..Supporting access to finance for SMEs and mid-caps is a top priority for the EIB Group.


Infrastructure is an essential pillar that interconnects internal markets and economies.


As the EU bank, we have made climate action one of our top priorities and today we are the largest multilateral provider of climate finance worldwide.

We commit to climate change adaptation and mitigationmore than 25% of our total financing.

One way of looking at the EIB is that it’s role involves some regional policy which is of course an apposite issue both across the region and within the Euro area. Although it comes with buzzwords and phrases like “smart,sustainable and inclusive growth” which mean what exactly?

As the EU bank, promoting economic and social cohesion is one of the principles that guide us throughout our activities. Our investments support the delivery of the Europe 2020 strategy for smart, sustainable and inclusive growth.

Also it operates a financial version of foreign policy.

Outside the EU, the EIB’s activities reflect EU external policy. The EIB is active mainly in the pre-accession countries and eastern and southern neighbours.
The EIB also operates in African, Caribbean and Pacific countries, Asia and Latin America, financing local private sector development, social and economic infrastructure and climate action projects.

Where does the money come from?

You may have spotted that the capital quoted is less than the lending with a ratio of one to a bit over four.

Building on its financial merits, the EIB is able to borrow at attractive rates, and the benefits of EIB’s borrowing conditions are passed on to project promoters.

It also specialises in what it calls green finance.

The Bank plays a leading role in the Green Bond market. The EIB issued the world’s first Green Bond in 2007, called Climate Awareness Bonds (CABs). Since then, the Bank has expanded CAB issuance across a number of currencies, providing benchmark size transactions in the core currencies EUR, USD and GBP.

It borrows very cheaply as last week it issue a three-year US Dollar bond at only 0.114% over what the US Treasury can borrow at. In January it borrowed for ten-years in Euros at a mere 0.742%. So we see that especially in these times of ultra-low interest-rates and bond yields the EIB is a vehicle that can provide lending for a very low annual cost. In that sense it has been quite a triumph as I do not believe it is picked up on national balance sheets and when I checked with the UK Office for National Statistics only realised numbers are picked up which matters as pretty much all of it is notional.

The UK and the EIB

The House of Lords reported on its role in the UK at the end of January.

The European Investment Bank (EIB) has been active in the UK since 1973,during which time it has lent more than €118 billion to key infrastructure projects…… In 2015 alone, the EIB provided £5.6 billion for 40 different projects, amounting to approximately one-third of total investment in UK infrastructure.

This provokes an immediate thought about another bank namely the Bank of England. The Funding for Lending Scheme which began in the summer of 2012 was supposed to push small and medium-sized business lending higher but did not, That looks even more of a failure as we note that until recently the EIB has been expanding its support of lending.

Next although the House of Lords do not put it this way we have a clear driver of the fall in business investment in the UK which was picked up in last week’s economic growth (GDP) data.

This is all the more worrying given the 87 percent fall in EIB funding since 2016 and the fact that new UK projects will no longer have access to the EIB after 29 March 2019, until and unless a future relationship is agreed.

So I can only support this conclusion 100%.

It is therefore seriously concerning that, with Brexit and the associated loss of access to EIB financing a matter of
weeks away, the Government has said nothing publicly about its ambitions for a future relationship with the EIB.

With the problems in the UK infrastructure arena with the failure of Carillion and the more recent problems at Interserve already providing flashing warning lights this echoes too.

Losing access to the EIB will have negative consequences for the financing of UK infrastructure. Not only does the EIB offer cheaper and longer-term loans than commercial lenders, but the quality of its independent expertise and due
diligence also provides projects with a stamp of approval that crowds in additional private investment.


There is a lot to consider here as we mull what is an organisation with many successes but also issues as we note it has come under more political control. For example the way it has a role in the financial version of foreign policy and being used as a type of Euro area fiscal policy under the ( Jean-Claude) Juncker Plan. Those are political rather than financial choices.

Next comes the issue of how the UK might Brexit from this and looking at the House of Lords report it is quite a scandal.

Under the Withdrawal Agreement, the UK will, over a period of 12 years, receive the €3.5 billion of capital it has paid in to the EIB. However, the UK will not receive any share of the profits that the EIB has accumulated, nor any
interest or dividends. Given that this could amount to €7.6 billion, almost 20 percent of the UK’s obligations under the £35–39 billion financial settlement, we regret that the Government has failed to provide an adequate explanation of the position taken in the negotiations.

Whoever is responsible for this on the UK side should be named and shamed.

Weekly Podcast




Good news for UK inflation comes with another attempt to mislead us

Yesterday saw quite a development in the UK inflation measurement saga as the Treasury Select Committee joined the fray by writing to the UK National Statistician John Pullinger.

As the Economic Affairs Committee presented in their report, the error caused the RPI to be artificially inflated by 0.3 percentage points in 2010……There was general agreement amongst the witnesses spoken to that the 0.3 percentage point increase was an error, and of course you yourself admitted this. Instead of fixing this however, you have designated RPI a “legacy measure”, making no further  improvements to the index. This is not a tenable position when the index remains in widespread use. The past RPI index-linked Gilt matures in 2068.

As I have already replied to the Financial Times on the subject there are some good parts to this but also problems.

Fair enough, except we have an immediate problem as the very bodies which have so failed us over the past 7 years such as the UK Statistics Authority are now supposed to fix a problem they are not only part of they have contributed to. When I gave evidence to it I felt it was simply going through the motions.

The National Statistician and the UK Statistics Authority have failed so comprehensively they cannot be part of the solution. Also as I have reflected on this there are two other problems. Firstly the approach above seems to want to turn the clock back to before 2010 when the RPI was affected by a change in the method of collecting prices for clothing which has turned out to especially impact fashion clothing. Whereas we need to go forwards with an improved model. Also they have come out with a 0.3% number out of thin air as I recall the evidence of Simon Briscoe who gave the most evidence in this area and he wanted further research to get a number rather than stating one, So this from the Treasury Select Committee is both unfounded and potentially misleading.

This has led to a £1 billion yearly windfall for index-linked gilt holders, at the expense of consumers, like students who have seen interest on their loans rise, or rail passengers affected by increasing fares.

You see students,consumers and rail passengers have been affected by a political choice which was to use the higher RPI for when we pay for things and the invariably lower CPI when the government pays for things. Former Chancellor George Osborne was responsible for this swerve which boosted the government;s finances via a type of stealth tax. So I can see why government MPs are keen to push this view but more surprised that opposition MPs have joined in, perhaps they were so busy looking good for the crowd they did not stop to think.

There is also another serious problem as I wrote to the FT.

Next we have the issue that official communiques seem to forget that there are problems with other inflation measures too. For example the House of Lords was very critical of a major part of the measure the UK Office for National Statistics has pushed hard.


“We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs”


Can anybody spot the mention of the flawed CPIH above? Those of a fair mind looking for balance would think it deserves it. You see it is always like that……

As you can see there are familiar issues here where the establishment takes evidence but then cherry picks it to come to an answer it wanted all along! A balanced report would recommend changes to both RPI and CPIH. After all the latter is supposed to be the new main inflation measure. Also the use of 0.3% seems to be answering a question before it has been properly asked! We were supposed to go forwards and measure the impact of the changes made in 2010 so if the MPs via their own expertise have calculated the answer at 0.3% they should explain their calculations and reasoning.

I will be writing to them challenging them on these issues. They seem to be unduly influenced by the work of the economics editor of the Financial Times Chris Giles who keeps claiming that index-linked Gilt holders who he called “the gnomes of Zurich” at the Royal Statistical Society. I have challenged him on that statement as after spending many years in that market I do not recall ever dealing with one of these creatures and we know that many UK pension funds including the Bank of England one invest in it instead. Until we do the proper research we cannot know if there has been a windfall let alone the size of it. Chris is much quieter these days past about his vigorous support of CPIH and rental equivalence.

Today’s Data

This brought some welcome good news.

The all items CPI annual rate is 1.8%, down from 2.1% in December.

This has various consequences as for example it has been quite a while since the Bank of England has been below its inflation target. Although as it was partly to do with the Ofgem price cap some of it will not last as it reversed it a few days ago.

The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago.

Actually just as I am typing this I see this on Sky News.

Energy supplier Npower says it will raise its standard gas and electricity prices by 10% from 1 April.

If we look further upstream for price trends we see that the pressure continues to be downwards.

The headline rate of output inflation for goods leaving the factory gate was 2.1% on the year to January 2019, down from 2.4% in December 2018…..The growth rate of prices for materials and fuels used in the manufacturing process slowed to 2.9% on the year to January 2019, down from 3.2% in December 2018.

If we move to the RPI we see that it fell as well and also would have been on target in annual terms.

The all items RPI annual rate is 2.5%, down from 2.7% last month. The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
2.5%, down from 2.7% last month.


It is a welcome development that I can point out that UK real wages are now increasing against all our inflation measures. After a credit crunch that has been something of a nuclear winter for real wage growth it is nice to see and report on, but sadly we have a long way to go to get back to where we were. Some good news in what looks like an economic downturn.

Let me translate my views on inflation measurement above to a real life example. You see if you follow the establishment mantra you tell people they are better off than they are as the Resolution Foundation has done here.


Using the CPIH inflation measure understates the fall in real wages we have seen via its use of rents that are never paid ( Imputed Rent) as a measure of owner occupied housing costs. For newer readers CPIH assumes that people who own a house pay themselves rent and even worse these “estimates” are based on rental data which is dubious and suggested by some to be 1% too low via the wrong balance between new and old rents. In a nutshell this is why I have persisted in my long campaign about inflation measurement because the establishment is happy to produce numbers which to be polite are economical with the truth. I am not.


UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.


We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.


The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Weekly Podcast




Help with UK energy prices turns into higher inflation just like with house prices

This morning has brought news which will have had Bank of England Governor Mark Carney spluttering as he enjoys his morning espresso. The Halifax Building Society does its best to hide it but their house price for January 2019 at £223,691 is lower than the £224,025 of a year ago. Or if you prefer the index at 724 is below the 725.1 of a year ago. Perhaps his staff will console him by reminding him that the index means that house prices are according to the Halifax over seven times higher than they were in 1983.

In case you were wondering how the Halifax spins it we are told this.

Prices in the three months to January were 0.8% higher than in the same three months a year
earlier – down from the 1.3% annual growth rate recorded in December.

Although they cannot avoid having to point out these two rather inconvenient facts..

House prices in the latest quarter (November-January) were 0.6% lower than in the preceding
three months (August – October)
On a monthly basis, house prices decreased by 2.9% in January, following a 2.5% rise in

The Halifax has another go at presenting the numbers and note the swerve from monthly to quarterly numbers which they omit to mention.

Attention will no doubt be drawn towards the monthly fall of -2.9% from December to January, the second time in
three years that we have seen a drop as a new year starts. However, the bigger picture is actually that house prices
have seen next to no movement over the last year, with annual growth of just 0.8%.
“This could either be viewed as a story of resilience, as prices have held up well in the face of significant economic
uncertainty, or as a continuation of the slow growth we’ve witnessed over recent years.”

So they have shown “resilience” by falling 2.9% in a month? That sort of language is of course central banker style as it covers banks which quite often then collapse. If we look for a pattern we see that the monthly moves are erratic but that the quarterly comparison has been negative for the last three months now. Also if prices remain here then 2019 will show some more solid annual falls because there were some blips higher last year especially in the summer.

Looking ahead

The underlying situation does not tell us a lot either way.

Monthly UK home sales latest quarter. December saw 102,330 home sales, which is very close to
the 5 year average of 101,515…….In December mortgage approvals showed little difference to the previous month. Bank of England industry-wide figures show that the number of mortgages approved to finance house
purchases – a leading indicator of completed house sales saw a flat 0.2% rise to 63,793. The December rate is still not far below the 2018 average of 64,913 but is 2,694 below the average of the past 5 years.

So maybe a little weaker which they try to offset with this.

On the demand side we see very high employment levels, improving real wage growth, low inflation and low mortgage rates.

The catch of course is that we saw plenty of house price growth with falling real wages and compared to them house prices took quite a shift upwards. Let us move on as we note that none of the house price measures we look at are perfect but that overall we have seen a welcome fall in house price growth which hopefully will begin the long road to making them more affordable again. Otherwise the only way for them to be more affordable is for more interest-rate cuts and credit easing, or a trip to negative interest-rates as we looked at yesterday.

Energy Inflation

Okay let me open with a reminder that we are looking at something that was badged as reducing energy costs with the implication that it would reduce inflation. Or to link with the topic above “help” with energy costs.

The price cap for customers on default (including standard variable) tariffs, introduced on 1 January 2019, will increase by £117 to £1,254 per year, from 1 April for the six-month “summer” price cap period. The price cap for pre-payment meter customers will increase by £106 to £1,242 per year for the same period. ( UK Ofgem)

As you can see those are pretty solid increases to say the least. Here is the explanation.

Capped prices only increase when the underlying cost of energy increases. Equally when costs fall consumers’ bills are cut as suppliers are prevented from keeping prices higher for longer than necessary.

The caps will continue to ensure that the 15 million households protected pay a fair price for their energy because the rises announced today reflect a genuine increase in underlying energy costs rather than supplier profiteering.

We do get something of a breakdown.

Around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which makes up over a third (£521) of the overall cap.

That is really rather odd as I note that the price of a barrel of Brent Crude Oil is at US $62.63 some 7% lower than a year ago. Of course there is the lower value of the UK Pound £ to take into account but that leaves us roughly unchanged. Or to put it another way UK weekly fuel prices at the pump have fallen by approximately ten pence per litre since the peaks in the autumn of last year.

Accordingly I hope that this is investigated as there is more to it than meets the eye in my opinion.

While the prices of wholesale energy contracts used for calculating the cap have fallen in recent months, overall these costs remain 17% higher than the last cap period (see wholesale energy charts below).

Also there are ongoing higher prices from the cost of green energy.

Other costs, including network costs for transporting electricity and gas to homes and costs associated with environmental and social schemes (policy costs), have also risen and contributed to the increase in the level of the caps.

These get tucked away in the explanation but over time have been substantial. If the establishment have the faith in them they claim why do they keep trying to hide it? there have been successes in the world of green power such as the substantial improvement seen from solar efficiency but we have made little progress in the obvious need to be able to store it. Also according to Wired the polar vortex which hit the US caused trouble for electric vehicles.

That’s because the lithium-ion batteries that power EVs (as well as cellphones and laptops) are very temperature sensitive.



There is a fair bit to consider here but let me start with my theme that the UK suffers from institutionalised inflation. For once let me give the BBC some credit as Victoria Fritz has figured out that something does not seem right.

11 million households protected by the Government’s energy price cap have been told that their bills are set to go up by around £100 a year. What good is a cap if it moves just months after it was set?

Governor Carney will be particularly keen on this form of inflation as he regularly flies around the world to lecture us on climate change, But on what is a Super Thursday as we get the quarterly inflation report ( Narrator, for newer readers it is usually anything but,,,) his mind will be on house prices and perhaps in the press conference he will have another go at this.

Mark Carney met senior ministers on Thursday to discuss the risks of a disorderly exit from the EU.

His worst-case scenario was that house prices could fall as much as 35% over three years, a source told the BBC. ( September 2018)

Or he 33% fall scenario suggested in November although of course that required a Bank Rate rise to 5.5% which stretched credulity to way beyond breaking point.

The Bank of England is not “paralysed” on interest-rates

From time to time we have the opportunity to observe the spinning efforts of the house journal of the Bank of England. So without further ado let me hand you over to the Financial Times.

Bank of England ‘paralysed’ on rates by Brexit uncertainty.

The first thought is which way?But then we get filled in.

Turmoil of EU departure constrains policymakers despite tight labour market.

So up it is then, but of course that brings us to territory which is rather well trodden. You see the Bank of England has raised Bank Rate a mere two times in the last eleven years! Thus the concept of it being paralysed by Brexit prospects is a little hard to take. Whereas on the other side of the coin it was able to cut interest-rates from the 5.75% of the summer of 2007 to the emergency rate of 0.5% very quickly including a reduction of 1.5%. That reduction was twice the current Bank Rate and six times the size of the 0.5% rises. Also we note that the panic rate cut of August 2016 not only happened quickly but means that the net interest-rate increase since the comment below has been a mere 0.25%.

This has implications for the timing, pace and degree of Bank Rate increases.
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.

That was Governor Mark Carney at Mansion House in June 2014 and we now know that “sooner than markets expect” turned out to be more than four years before Bank Rate rose above the 0.5% it was then. But I do not recall the FT telling us about paralysis then about our “rock star” central banker.

The case for an interest-rate rise

There is one relief as we do not get a mention of the woefully wrong output gap concept. But we do get this.

Unless the UK’s sub-par productivity improves, the BoE has argued, unemployment cannot remain at current lows without wage growth feeding consumer prices. The latest data showed the labour market tightening again with employment at a record high and wage growth back to pre-crisis levels. “If they further home in on labour market trends, it will be a clear steer that they have a bias to tighten,” said David Owen, chief European economist at Jefferies, who thinks market pricing currently underestimates the likelihood of UK interest rates rising.

There are two main issues with the argument presented. The first is the productivity assumption where the Bank of England now assumes it has a cap based on a “speed limit” for the economy of an annual rate of growth of 1.5%. It’s assumptions are more likely to be wrong that right. Next is that wage growth is back to pre-crisis levels which is simply wrong. It is around 1% per annum short in nominal terms and simply nowhere near in real terms.

According to Kallum Pickering at Berenberg the Bank of England has really,really,really,really,really,really ( Carly Rae Jepsen)  wanted to raise interest-rates.

“The BoE would be close to the Fed on rate profile if it weren’t for Brexit . . . The Fed wants to pause, but the BoE has gone slower than otherwise,” he said, adding that barring a hard Brexit, the MPC would need to increase rates for a couple of years to catch up.

Sooner of later someone will turn up with the silliest example of all.

Although the BoE maintains it has plenty of firepower to fight any downturn, some outsiders believe one motive to raise interest rates is to gain space to inject stimulus if needed.

A type of Grand Old Duke of York strategy where you march interest-rates to the top of a hill just so that you can march them down again.

Some Reality

The water gets rather choppy as we find a mention of the inflation target.

Similarly, the BoE is likely to cut its near-term forecast for inflation — already close to target, at 2.1 per cent in December, and set to fall further after a drop in energy prices.

If you were serious about raising interest-rates then the period since February 2017 when inflation went over target would be an opportunity to do so except we only got a reversal of the August 2016 mistake and one other. If you go at that pace when inflation is above target it would be really rather odd to do much more when it is trending lower.

The next issue is the economic outlook where we have been recording economic slow downs in both China and Europe. Some of this is related to the automotive sector which has always affected the UK via Jaguar Land Rover and more recently Nissan. On its own that would make this an odd time to raise interest-rates. If we move to the UK outlook then this mornings Markit Purchasing Manager’s Index or PMI tells us this.

January data indicated a renewed loss of momentum for
the UK service sector, with a decline in incoming new work
reported for the first time since July 2016. Subdued demand
conditions meant that business activity was broadly flat
at the start of 2019, while concerns about the economic
outlook weighed more heavily on staff recruitment. Latest
data pointed to an overall reduction in payroll numbers for
the first time in just over six years.

Some care is needed here as the Markit PMI misfired in July 2016 but we need to recall that the Bank of England relied on it. We know this because that October Deputy Governor Broadbent went out of his way to deny it.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately
after the referendum and, although we aimed off those significantly, somewhat more strongly than our near term forecasts as well.

So in spite of it being an unreliable indicator at times of uncertainty like now I expect the Bank of England to be watching it like a hawk. If so they will be looking at this bit.

Adjusted for seasonal influences, the All Sector Output Index posted 50.3 in January, down from 51.5 in December. The index has posted above the crucial 50.0 no-change mark in each month since August 2016, but the latest reading signalled the slowest pace of expansion over this period and the second-lowest since December 2012.

If accurate that is in Bank Rate cut territory rather than a raise.


There is a fair bit to consider here so let us start with the “paralysis” point and let me use the words of the absent-minded professor Ben Broadbent from October 2016.

Before August, the UK’s official interest rate had been held at ½% for over seven years, the longest period of
unchanged rates since 1950. No-one on the current MPC was on the Committee when rates were previously
changed, in early 2009; indeed there are children now at primary school who weren’t even alive at the time.

Oh well as Fleetwood Mac would put it. Next comes the issue of why the Bank of England is encouraging what is effectively false propaganda about raising interest-rates? Personally I believe it is a type of expectations management as they increasingly fear that they will have to cut them again. So we are being guided towards the view that events are out of their control. This is awkward as we note the scale of their interventions ( for example some £435 billion of QE) and the way that positive news is always presented as being the result of their actions. Yet they also claim when convenient that lower interest-rates are nothing to do with them at all.

As to my view I am still of the view that we need higher interest-rates but that now is not the time. The boat sailed in the period 2014-16 when the rhetoric of Forward Guidance was not matched by any action. It is hard not to have a wry smile at us being guided towards a 7% unemployment rate then 6.5% and so on to the current 4%.

Welcome news from UK Money Supply growth

Today brings UK credit growth especially unsecured credit growth and the Bank of England into focus so let me open with the market view on interest-rate prospects.

Interest rate swap markets have cut expectations of a quarter-point rate hike from the Bank of England by the end of 2019 to 52 percent on Wednesday, compared to a previous 64 percent expectation.

The latest leg down in market expectations of a rate hike comes after overnight political developments that has sown fresh uncertainty for the British economy in the near term. ( Reuters)

Personally I find that rather odd as I think a cut is about as likely as a rise. Indeed with slowing world economic growth in ordinary circumstances people would be looking for a cut. I can understand those who think that in a disorderly Brexit the Bank of England might be forced to raise interest-rates to defend the value of the UK Pound £. But the catch is that when the Pound fell after the EU Leave vote Governor Carney and his colleagues decided to cut rather than raise Bank Rate. So it would require a collapse in the Pound for the Bank of England to raise rates.


There is a curious situation about the gold that is stored by the Bank of England but belongs to Venezuela. Reuters explains.

It is a decision for the Bank of England whether to give Venezuelan President Nicolas Maduro access to gold reserves it holds, British junior foreign office minister Alan Duncan said on Monday.

Venezuelan opposition leader and self-declared president Juan Guaido has asked British authorities to stop Maduro gaining access to gold reserves held in the Bank of England, according to letters released by his party on Sunday.

As that is an official denial from Alan Duncan we immediately suspect the government has applied pressure on the Bank of England. But it is left in an awkward position and so far it has refused to return the gold to Venezuela which begs more than a few questions as it holds quite a lot of gold for foreign countries.

If we look into the situation the Bank of England holds some 165,377,000 troy ounces.

 A troy ounce is a traditional unit of weight used for precious metals. It is different in weight to an ounce, with one troy ounce being equal to 1.0971428 ounces avoirdupois.

It has been falling recently but rose quite a bit in the latter part of 2016 and 2017. In terms of gold bars it is a bit over 413,000. Contrary to what some claim the UK still has some gold ( worth £9.41 billion in the 2017/18 accounts) as pert of its foreign exchange reserves.

Returning to the issue of Venezuela I see George Galloway has got rather excited on RT.

The bank’s decision to seize – a polite word for steal – more than a billion dollars’ worth of Venezuelan gold was reportedto have been ordered by the governor after a call from US National Security Advisor John Bolton and Secretary of State Mike Pompeo – not even the president himself.

Apart from that being hearsay they have not seized it as they already had it but they are currently refusing to return it. I have some sympathy at the moment as who should they return it too in a country which is in turmoil? A lot of other markets concerning Venezuela have seen changes as for example the market in bonds of the state oil company PDVSA has dried up.

So to my mind the current position of the Bank of England has a weakness ( fears you might not be able to get your gold back) but also a strength ( it will question who is reclaiming it). Also as to how much of the gold at the Bank of England is actually gold here is John Stewart with a different perspective.

People out there turnin’ music into gold
People out there turnin’ music into gold
People out there turnin’ music into gold

Money Supply and Credit

These are hot topics on two counts. Firstly slowing money supply growth proved to be a reliable indicator of weak economic growth in 2018 and secondly soaring unsecured credit growth showed vulnerabilities in the UK economic structure.

So we first observe a welcome move.

The total amount of money held by the UK private sector (broad money or M4ex) increased by £11.5 billion in December. Within this, money held by households increased £5.5 billion, significantly above the £3.2 billion average over the past six months. This increase was driven by deposits in interest-bearing instant access savings accounts. Money held by UK private non-financial corporations (PNFCs) increased £1.5 billion, in line with the recent average.

This means that the annual rate of growth has risen from 2.2% to 2.5%. This is still weak but a more hopeful sign emerges if we look at the latest three months because they show an annualised rate of growth of 4.3%.

If we switch to a lending side style analysis we see this.

Households borrowed £4.1 billion secured against property in December, slightly above the average of the previous six-months……The amount businesses’ borrowed from UK banks………. Borrowing from banks remained robust in December at £2.3 billion.

If we add in unsecured credit and the other components we see that lending growth rose to 3.7% from the recent nadir of 3.1% in September.

Unsecured Credit

Here are the numbers.

The extra amount borrowed by consumers to buy goods and services fell to £0.7 billion in December . Within this, credit card borrowing was particularly weak at only £0.1 billion, compared to an average of £0.3 billion since July. The overall consumer credit monthly flow was slightly below the £0.9 billion monthly average since July, and significantly below the average between January 2016 and June 2018 of £1.5 billion.

We need to take care with phrases like “particularly weak” as credit card borrowing has been on something of a tear in the UK meaning that at £72.2 billion it is 7.1% higher than a year ago. Perhaps Deputy Governor Dave Ramsden wrote that but as he of course described 8.3% growth as “weak” not so long ago.

The annual growth rate of consumer credit has been slowing gradually since its peak of 10.9% in November 2016, falling further to 6.6% in December.

So we have a nuanced view here which is threefold. Firstly it is welcome to see a decline in the rate of growth. A catch though is that this rate of growth is on inflated levels and is still far higher than other numbers in the UK economy at around quadruple the rate of economic growth and double wage growth. Lastly the peak of November 2016 suggests it was puffed up by the “Sledgehammer QE” and Bank Rate cut of August 2016 a subject the Bank of England would rather not discuss.


There is a fair bit to consider here but let us start with a welcome improvement in the UK money supply trajectory.  I realise this is against the rhetoric we hear from elsewhere but the numbers are what they are. At a time when the world outlook is weak we need to grab every silver lining. The situation is more complex with unsecured credit because whilst the annual rate of growth is slowing some of that is due to it being on a larger amount ( £215.6 billion). Also some of it is due to a slowing of car loans as we see that sector slow due to technical reasons such as the diesel debacle. According to the UK Finance & Leasing Association car finance had 0% growth in November as falls in new car finance were offset by higher used car finance. This is at a time where we continue to pivot towards a rental/lease model as opposed to an outright purchase one.

The percentage of private new car sales financed by FLA members through the POS was 91.2% in the twelve months to November.

Let me end with some good news and a compliment for Governor Mark Carney. It comes from a disappointingly downbeat comment from Katie Martin of the Financial Times.

There’s more trade in the renminbi in London than there is in the euro vs sterling, which is weird/interesting.

Actually that is good news and confirms a conversation I had a while back with one of the managers of the Chinese state body in the City. It is an area of strength for the UK economy and I believe the Bank of England has supported this. Not all areas of banking are bad just some.

Can the good news from UK wage growth last?

Today is one of those days where we find ourselves awash in economic data from the UK. The labour market data usually comes out the day before the inflation numbers but it is a week late and has been produced at the same time as the public finances numbers. So whilst this is not what is called a theme day we have a lot to digest as we mull why the public finances were not released yesterday or tomorrow so they could get their own space and attention.

Let us start with some good news from an area that has been short of it in the credit crunch era.

Looking at annual growth rates for total pay (including bonuses), between September to November 2017 and September to November 2018:


total pay in nominal terms increased by 3.4%, the annual growth rate has not been higher since May to July 2008.


total pay in real terms increased by 1.2%, the annual growth rate has not been higher since September to November 2016.

I am pleased to see a concentration on total pay as whilst we learn something from regular pay the main number of interest is the total. It has risen to the highest it has been for over a decade and according to the official measure at least we have some sort of solid real wage growth. The actual picture in terms of real wages is not as good as that sadly because it relies on the CPIH measure that found itself under fire from the House Of Lords only last week.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs

But even if we switch to other inflation measures which are invariably higher we see that we have at least some real wage growth albeit not much if compared to RPI, but at least we have some. If we switch to the monthly numbers we see that they are erratic but the last 3 readers at 2.9% then 4% then 3.2% do show a drift higher and thus we may see another better three-monthly figure next time around. The catch will be when the October 4% drops out because we might then see something of a sharp fall.

Moving to actual amounts we see this.

For November 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was:

£527 per week in nominal terms, up from £510 per week for a year earlier.£495 per week in constant 2015 prices, up from £490 per week for a year earlier, but £30 lower than the pre-downturn peak of £525 per week for February 2008.

Put like that there is something of a quirk in the numbers as it was £528 in October so wages are up on a year before but down on a monthly basis so I think we need to welcome the news but cross our fingers looking ahead. The areas which have been pulling the numbers higher have been construction ( 4% in November) which in general has been doing well over the past year and finance ( 4.2% in November) which has picked up  in the last couple of months.


This continued the good news theme.

The employment rates for both men and women have been generally increasing since early 2012. For the latest time period, September to November 2018, the employment rate for all people aged from 16 to 64 years was 75.8%, the highest since comparable estimates began in 1971.

This area was the first to turn around back in the day and regular readers may recall it was a leading indicator when other signals both lacked and lagged. It took the economic output numbers ( GDP) another year or so to catch up.

Whilst the rate of growth has slowed it remains positive.

For September to November 2018, there were an estimated 32.53 million people aged 16 years and over in work, 141,000 more than for June to August 2018 and 328,000 more than for a year earlier.

Although some have been forced into this situation as for example by this.

The increase in the employment rate for women over the last few years has been partly due to ongoing changes to the State Pension age for women, resulting in fewer women retiring between the ages of 60 and 65 years.


Here the news was more nuanced as we see that relatively things improved.

the unemployment rate for all people was 4.0%, it has not lower been since December 1974 to February 1975

But in absolute terms the number rose in the quarterly period measured.

1.37 million unemployed people, little changed (up 8,000) compared with June to August 2018 but 68,000 fewer than for a year earlier.

Public Finances

Let us look at this from the labour market data which would suggest rising income tax revenues and higher VAT receipts from the combination of higher wages and more people being employed.

Central government receipts in December 2018 increased by 4.3% compared with December 2017, to £59.8 billion……

Much of this annual growth in central government receipts in December 2018 came from Value Added Tax (VAT), Income Tax, Rail Franchise Premia and National Insurance contributions compared with December 2017.

So that does seem to have some backing and if we switch to the fiscal year so far we see that income tax receipts have risen by £8 billion to £128.2 billion compared to last year. These extra receipts combined with some more VAT and for once some extra from Corporation Tax ( up £2.3 billion to £45.8 billion) have played their part in this.

Borrowing in the current financial year-to-date (YTD) was £35.9 billion, £13.1 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

There was an issue with the December numbers and it was pretty much from something not far off most people’s lips these days.

Borrowing (public sector net borrowing excluding public sector banks) in December 2018 was £3.0 billion, £0.3 billion more than in December 2017;

Here it is.

In December 2018, the UK’s net contribution to the European Union (EU) was £1.5 billion higher than in December 2017……In December 2018, there have been some amendments to member states’ contributions to 2018 EU budget, however the amount returned to the UK is much smaller than in December 2017.

As to the national debt it continues to rise but it has been outperformed by the economy so in relative terms it has fallen.

Debt (public sector net debt excluding public sector banks) at the end of December 2018 was £1,808.9 billion (or 84.0% of gross domestic product (GDP)); an increase of £48.6 billion (or a decrease of 0.5 percentage points of GDP) on December 2017.



We see that the main trends looked at today provide some welcome mid-winter cheer for the UK. The key signal these days is real wages and the difference to 2016 is that this time around we have some wage growth rather than the leader being lower inflation. This will boost other areas of the economy and it has done its bit for the public finances.

However there are dark clouds out there and it is hard not to think of what is happening in China and in the car sector as we note that manufacturing wage growth has been declining over the past 12 months.. The 3.1% of November 2017 was replaced by a mere 1.2% this November reminding us that some areas are singing along with Taylor Swift.

Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble