The Bank of England is in a pickle

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by Shaun Richards

On Friday we looked at the troubles of the ECB which have been exacerbated in another area this morning as inflation in Spain has risen to 5.6%. If we switch our perspective to the UK we see a Bank of England that also has inflation troubles albeit not yet at that level and is also still easing policy as there will be another £1.15 billion of QE bond buying later today. However it’s buying is in its last phase as it has already bought some £865 billion of the £875 billion planned. So its large push to the narrow money supply will soon be over.

Switching to interest-rates its position looks rather confused with the second incarnation of the Unreliable Boyfriend at the helm. Last week we saw this added to by Silvana Tenreyro.

LONDON, Nov 24 (Reuters) – Bank of England policymaker Silvana Tenreyro said on Wednesday that she was thinking “more in the medium term” about the question of when the British central bank should start to raise interest rates from their pandemic emergency low.

I am not sure she could be more clear about her plan to ignore the inflation rise which then leaves us with the question if she would ever raise interest-rates? Even then she would not move them by much.

Tenreyro said she saw the BoE’s Bank Rate eventually rising back to its pre-pandemic level of 0.75% from 0.1% now.

On a technical level that would mean that the stock of QE would be as I have often suggested forever as we would not reach the present 1% threshold. But for her it feels like that the answer will continue to be no.

As to Jonathan Haskel you might wonder what he thinks his job is after this crucial part of his speech last week? He starts by apparently not realising how badly things then went for the ECB after it boasted like this.

The Bank of England was made independent in 1997. Since then, average inflation has been… 2%, the
current target

Then his breakdown suggests his job is mostly pointless.

There has been variation around that 2% since then. On average, of every deviation of inflation from
target,
a. 24% has been due to food and energy,
b. 13% due to taxes like VAT and
c. 25% due to sharp exchange rate movements and imported prices.
Thus around 62% of inflation deviations from target is due to outside forces that are difficult for a central bank to
control in the short run.

Firstly it is not the Bank of England’s job to control short-term inflation. Next I would argue that the Bank made factor c worse back in 2016 when Governor Carney choose to turn up on TV and promise further easing thus pushing the UK Pound £ lower. That is before you get to any thoughts about changing interest-rates or using the foreign exchange reserves. That is before you get to the obvious swerve below.

So the puzzle is: why did inflation run away then, but not now? Are we somehow better insulated from these
and other shocks to the economy or are we destined for a repeat of the 1970s?

Many would argue that he is comparing a decade’s experience with a few month’s and frankly that inflation is running away quite fast enough!

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Or you could apply a rule of thumb that I use which is that the speech has a lot of algebra which is invariably used to central bankers to justify inaction.

Today’s Data

Mortgages

I feel sorry for which research student had to explain this development to the Governor at today’s morning meeting.

Net borrowing of mortgage debt by individuals amounted to £1.6 billion in October, down from £9.3 billion in September. This is the lowest since July 2021 when individuals repaid £2.2 billion of mortgage debt, on net.

Whilst there is an explanation we know that the Bank has a different reaction function to this from the inflation issue we looked at above.

October’s decrease was driven by borrowing brought forward to September to take advantage of stamp duty land tax relief, before it was completely tapered off. The net borrowing in October was £4.6 billion below the 12-month average to June 2021, when the full stamp duty holiday was in effect.

As an aside there is a curiosity below. We can all figure out why lending might fall but they then always assume repayments do as well but why?

Gross lending fell sharply to £19.3 billion in October, from £30.7 billion in September. Gross repayments fell to £18.2 billion from £20.6 billion in September.

There was more bad news further down the mortgage chain.

Approvals for house purchases, an indicator of future borrowing, fell to 67,200 in October, from 71,900 in September. This is the lowest since June 2020, and is close to the 12-month average up to February 2020 of 66,700.

Mortgage Rates

There was quite a move here which may have cheered the Governor up a bit.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages fell 19 basis point to 1.59% in October, which is a new series low. The rate on the outstanding stock of mortgages ticked down 1 basis point to a new series low of 2.03%.

I have regularly argued that moves in the Term Funding Scheme invariably turn up in the mortgage market and if we look back to the 19th there was this.

The loan liability under the TFS umbrella increased by £57.3 billion between September and October 2021 and now stands at £171.5 billion, adding an equivalent amount to the level of debt.

As most mortgages are fixed-rate then it is not as simple a link as it might be as this is Bank Rate focused lending. It could be hedged or perhaps some do not believe the Bank of England will act.

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Consumer Credit.

There will have been a little more cheer at the morning meeting for this.

Individuals borrowed £0.7 billion in consumer credit in October, on net. The majority of this was £0.6 billion of additional borrowing on credit cards, which is the strongest net borrowing since July 2020. Individual borrowing in other forms of consumer credit (such as car dealership finance and personal loans) accounted for the other £0.1 billion of net lending.

It is interesting that there is a mention of car dealership finance and perhaps there is a flicker here caused by the rise in used car prices we have seen? We have to surmise because we are told so little.

Deposits

People are continuing to increase their bank deposits.

Households deposited an additional £5.5 billion with banks and building societies in October. In addition, households deposited £0.9 billion into National Savings and Investment (NS&I) accounts in October, which are not captured within household deposits but can act as a substitute for them.

I raise the issue not only because we may be seeing more savings but also because the bank’s if we allow for the extra TFS funding must be awash with cash/liquidity right now.

Comment

I find it fascinating that Bank of England policy was reducing mortgage interest-rates just as its Governor and Chief Economist were giving strong hints about increases. They then compounded the problem by in the case of the Chief Economist Huw Pill contradicting the Forward Guidance message which has been in play since 2013. It all looks quite a mess as the response to the new Omicron variant of Covid puts another brake on economies.

Meanwhile the rise in the money supply continues as the annual rate of growth is 7.7% with another £15.1 billion in October. So we can expect inflation to be singing along with Glenn Frey for a while yet.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

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