The Bank of England is in a pickle of its own making

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by Shaun Richards

This week has seen a ratcheting up of pressure on the Bank of England with the problem being that it has come from opposite directions. But let me start with what it considers to be its main priority and something that will please who had the job of presenting the morning meeting to Governor Andrew Bailey.

NatWest Group tripled its profits in the third quarter to a better than expected £1.1bn thanks to a jump in mortgage lending and a recovery in the economy despite setting aside cash to cover fines linked to money-laundering charges. ( The Guardian)

Indeed there was more.

The bank also benefited from increased lending, including a £2.5bn worth of mortgages. This helped lift its third-quarter pre-tax profits from £355m this time last year to £1.1bn, and higher than the £677m expected by analysts.

A bank making more profits and benefiting from all the efforts of the Bank of England to juice the mortgage and housing market. That is exactly the way to get the Governor to smile benevolently at the presentation especially if they add in this from Reuters.

NatWest’s profit rise follows bumper quarterly earnings from rivals Barclays (BARC.L), HSBC (HSBA.L) and Lloyds (LLOY.L) this month, as Britain’s economic rebound from pandemic lockdowns boosted profits.

The meeting can go on to explain how the cuts in Bank Rate to 0.1% accompanied by all the QE bond buying ( another £3.45 billion this week) topped off by the piece de resistance the Term Funding Scheme. This means that “The Precious! The Precious!” has been bailed out in another form.

The Office for Budget Responsibility joined the party this week.

The OBR has now predicted that house prices will go up by 8.6% this year, compared with a year earlier. The annual rise would then slow to 3.2% in 2022, before decelerating further to 0.9% in 2023, it said.

House price rises of 1.9% in 2024, 2.9% in 2025, and 3.5% in 2026, have been predicted by the OBR, although history shows that longer-term forecasts of house prices are more difficult to make accurately. ( BBC )

That is an interesting kicker at the end from the BBC which seems to be unaware that the OBR finds forecasting anything difficult to make accurately! But remember that will not be the view from the Bank of England where staff long for the pension boost and easy life provided by a term at the OBR.


We can continue that vibe with this morning’s release.

Individuals borrowed £9.5 billion of mortgage debt, on net, in September from £4.4 billion in August. This is the highest since June 2021 when net borrowing reached a record of £17.1 billion. September’s increase was driven by borrowing ahead of the complete tapering off of lower stamp duty from October. The net borrowing in September was £2.9 billion above the 12 month average to June 2021, when the full stamp duty holiday was in effect. Gross lending increased sharply to £30.7 billion in September, from £20.9 billion in August. Gross repayments also increased to £20.7 billion from £17.7 billion in August.

As you can see there was another surge and a wise presenter will note the implication for bank profits in the third quarter of this year. An emphasis on the gross lending surge will help especially if you can manage to dodge the rise in saving via repayments.

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Further up the chain we have approvals.

Approvals for house purchases, an indicator of future borrowing, fell to 72,600 in September, from 74,200 in August. This is the lowest since July 2020, but remains above pre-February 2020 levels.

Not so bad from a central banking viewpoint after the surges earlier this year.

The set was completed by something maybe a little surprising and likely to be the last of its kind for a bit.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages fell 4 basis point to 1.78% in September. That is below the rate in January 2020 (1.85%) and the series average since March 2020 (1.83%). The rate on the outstanding stock of mortgages ticked down 1 basis point to a new series low of 2.04%.

A little suprising in the sense that mortgages are now fixed-rate in the vast majority ( 94.7% for new ones) and UK bond yields have been rising. But no doubt some hedges were still running and whilst for example the UK five-year yield did edge up in September the big move to 0.79% as I type this has come this month. So I think that the public have been wise to do this.

Approvals for remortgaging (which only capture remortgaging with a different lender) rose slightly to 41,500 in September. This remains low compared to the months running up to February 2020, but is the highest since March 2020.

If you did remortgage it looks good now and we can now shift to another factor which is in play.

International Interest-Rates

We can start with the poor soul who was presenting yesterday’s morning meeting at the Bank of England and had to explain the actions of the Banco de Brasil. “No not to 1.5% Governor by 1.5%”. That sets a backdrop of rising interest-rates and to that we can if we take a trip to a land down under see a strong move in bond yields.

SYDNEY, Oct 29 (Reuters) – Australia’s central bank on Friday lost all control of the yield target key to its stimulus policy as bonds suffered their biggest shellacking in decades and markets howled for rate hikes as soon as April.

Really what happened?

An already torrid week for debt got even worse when the Reserve Bank of Australia (RBA) again declined to defend its 0.1% target for the key April 2024 bond , even though its yield was all the way up at 0.58%……..Scenting capitulation, speculators sent the yield sky-rocketing to 0.75% while yields on three-year bonds recorded their biggest monthly increase since 1994.

Apologies for the journalistic hype there but to be fair younger journalists have very little experience of bond market drops.

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The issue here is of a central bank being forced to face the consequences of its own actions in terms of QE bond buying. There is a difference with us because the RBA went for maximum control freakery with what is called yield curve control aiming at 0.1%. What did they think would happen when they stopped? This has implications for the Bank of England which is approaching the end of its own bond buying scheme with just over £25 billion to complete.But it has been seeing yield rises in spite of its weekly purchases of £3.45 billion of UK bonds. Thus Governor Bailey will be rather nervous around now and of course he has exacerbated things with his own rhetoric about interest-rate increases.


The developments here are like being between a rock and a hard place. The Bank of England wanted to egg on the chances of an interest-rate rise but now finds international markets racing ahead. For example they are now pricing in a 0.2% rise for the ECB which looks silly to me as it is if anything more likely to cut if the slow down we are seeing this quarter continues.

Should they now raise and feed the markets they could see a further push in bond yields and thereby future mortgage rates and potentially undo all the good work ( their thoughts not mine) with house prices.

“Oh, what a tangled web we weave, when first we practice to deceive!” ( Sir Walter Scott )

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