As November ends and we move into December there is a fair bit for the Bank of England to consider.Only a week ago we were told this by the new “flash” Markit PMI business survey.
“The weak survey data puts the economy on course for a 0.2% drop in GDP in the fourth quarter, and also pushes the PMI further into territory that would normally be associated with the Bank of England adding more stimulus to the economy”
Poor old Markit never seem to question why more stimulus is apparently nearly always needed, But this was quite a different outlook to what the Bank of England had told us earlier this month.
The MPC expected continued subdued growth, of 0.2%, in 2019 Q4.
Another factor to add in is that the Bank of England has in an example of being once bitten, twice shy lost a bit of faith in the Markit PMIs since the day the absent-minded professor Ben Broadbent so lauded them.
Although business survey indicators, taken together, pointed to a contraction in GDP in Q4, the relationship between survey responses and growth appeared to have been weaker at times of uncertainty and some firms may have considered a no-deal Brexit as likely when they had
responded to the latest available surveys/
Even central bankers must realise that the panicky hints of a 0.1% Bank Rate based on the post EU Leave vote PMIs was a complete failure.
The UK Pound £
This has been in a stronger phase and was noted in the monetary minutes.
The sterling exchange rate index had
increased by around 3% since the previous MPC meeting, and sterling implied volatilities had fallen back
somewhat, although they remained significantly higher than their euro and dollar counterparts.
If we look now we see that the broad effective or trade weighted exchange rate fell to around 73.5 in mid August but is now 79.3. Under the old Bank of England rule of thumb that was considered to be nearly equivalent to a 1.5% interest-rate rise. Even if we reduce the impact as times have changed I think and trim the effect we are still left in my opinion with say a 1% rise.
We can look at that in two ways.Firstly it has a material impact and secondly it has hard not to have a wry smile. After all who can actually see the present Bank of England raising interest-rates by 1%?! Events would have to have taken over.
Broad Money
We can also look at the likely outlook via the money supply numbers. This morning the Bank of England has told us this.
Broad money (M4ex) is a measure of the amount of money held by households, non-financial businesses (PNFCs) and financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs). Total money holdings in October rose by £1.6 billion, this was weak compared to both September and the average of the previous six-months.
That is a slowing after three better months. This is an erratic series and we see that this month businesses were responsible.
The amount of money held by households rose by £3.7 billion in October, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings fell by £2.4 billion, while the amount held by PNFCs rose by £0.4 billion.
If we switch to what does this mean? Well broad money impacts nominal output around 18 months to 2 years ahead. So with an annual rate of growth of 3.6% we would expect economic growth of 1.6% assuming the Bank of England hits its 2% inflation target. That’s the theory as reality is usually not so convenient so please take this as a broad brush.
The good news is that the last 6 months or so have seen a pick-up so we may see one in 2021.The problem is that the numbers had been falling since the impact of the “Sledgehammer QE” of the summer/autumn of 2016. So it is no great surprise to those who look at the monetary data that economic growth has been weak and using it suggests similar as we head into 2020.
Mortgage Lending
We cannot look into the mind of a central banker without noting the large area taken up by the housing market.From that perspective this is good news below.
Net mortgage borrowing by households was £4.3 billion in October, £0.4 billion higher than in September. The recent stability in the monthly flows has left the annual growth rate unchanged at 3.2%, close to levels seen over the past three years. Mortgage approvals for house purchase (an indicator for future lending) fell slightly in October, to 65,000, but remained within the narrow range seen over the past two years.
Indeed their hearts must have been racing when they read this in the Guardian yesterday.
House price growth in the UK has picked up
Only to be dashed when they read further down.
The average price of a home rose by 0.5% in November to £215,734, according to Nationwide building society. This is the biggest monthly rise since July 2018, and up from 0.2% in October. The annual growth rate picked up to 0.8% from 0.4%, the highest since April.
Whilst we welcome the relative improvement in affordability from the point of view of the Bank of England this will lead to head scratching. They went to a lot of effort with the Funding for Lending Scheme back in the summer of 2012 to get net mortgage lending back into positive territory. But it and real wage growth have lost their mojo for now in this area.
Consumer Credit
By contrast this has lifted off again.
The extra amount borrowed by consumers in order to buy goods and services rose to £1.3 billion in October, above the £1.1 billion average since July 2018. Within this, net borrowing for both credit cards and other loans and advances rose, to £0.4 billion and £1.0 billion respectively.
The annual growth rate of consumer credit was 6.1% in October, up from 5.9% in September.
Is there anything else in the UK economy rising at an annual rate of 6.1%? Also there is an element of being economical with the truth below.
This is the first increase in the annual growth rate since June 2018, but it remains considerably lower than its post-crisis peak of 10.9% in November 2016.
You see last month they revised the figures by adding an extra £6.1 billion or around 5 months worth of growth at the current rate. Anyway the total is now £225 billion.
Comment
For the moment the Bank of England is in a type of purdah period which the Governor is using to expand into other areas.
The world needs a new, sustainable financial system to stop runaway climate change…….A new, sustainable financial system is under construction. It is funding the initiatives and innovations of the private sector and amplifying the effectiveness of governments’ climate policies—it could even accelerate the transition to a low-carbon economy. ( IMF )
Those worried about the future of the planet should be terrified at the present march of the globetrotting central bankers onto their lawns.Just look at their track record! But I guess Governor Carney is in need of a new job.
Returning to his present job we see that an interest-rate cut on the 19th of next month is looking increasingly likely. After all they are seldom much bothered by issues such as consumer credit rising although these days they seem to be having ever more trouble simply counting.
Some statistics on the outstanding amount of lending and deposits within the banking sector have been revised for September. In the first vintage of September’s statistics, some of this data was reported using an approach that was inconsistent to previous data, and reduced the total amounts outstanding. The current vintage of data corrects for this.
Even less reason for them to be involved in the future of the planet and that is before we get to their forecasting record….
The Investing Channel