This afternoon will see yet another bond buying operation from the Bank of England as another £1.473 billion is purchased. Tuesday is what I call heavy-duty QE ( Quantitative Easing) as it purchases longer dated maturities and indeed regularly buys what are called ultra longs as the maturities in the UK bond or Gilt market go out as far as 2071. That length of purchase is unusual as for example the ECB only purchases out to 30 years so 2050 at the moment. This adds to the £1.473 billion bought yesterday and it will be the same tomorrow as the week in this regard ends early.
I get asked regularly how they pay for this? In line with today’s theme the money is created by the Bank of England which then uses it to buy the bonds. Thus the money supply is increased and this week it will be increased by just over £4.4 billion from this route. In one sense this is a pure profit for the Bank of England and is what is called seigniorage except in the past it was the profit on issuing actual notes and coins whereas now it is electronic and thus costs very little.
There is a nice little earner for the Bank of England as it charges Bank Rate on this to the Special Purpose Vehicle set up to hold the bonds so ironically cutting it to 0.1% reduces its profit on this. You can see that the accounting method and I stress this is simply an accounting method did not think negative interest-rates were going to happen as they will be booking a loss in that eventuality!
So the money supply has been expanded via this route by £672 billion in total or in the recent phase £237 billion as of the end of last week. This goes into the narrow money supply which used to be called “high powered money”. I point that out because in the credit crunch era it has proved to be anything but that because as they have pumped up the money supply the usage of it it what is called Velocity has fallen. In fact Velocity has at times fallen faster than the money supply has risen but central banks turn a Nelsonian blind eye to that reality. They are consistent in preferring theory to reality.
There will have been smaller influences on the money supply from the purchases of Corporate Bonds ( £19 billion) and the Covid Corporate Financing Faciity ( £16.4 billion). However not all the CCFF will count as an increase in the money supply as some of the commercial paper bought will already be counted.
Today’s Data
This will have caused angst at the Bank of England and you will quickly see why.
Overall, private sector companies and households reduced their holdings of money in August, following 5 months of unusually strong deposit flows. Sterling money (known as M4ex) fell by £0.9 billion in August, down from an increase of £25.6 billion in July.
The private sector made a net repayment of loans in August. Sterling net lending to private sector companies and households, or M4Lex, was -£3.9 billion, following a net repayment of £0.5 billion in July.
Yes that is a fall and may be the reason we have had more hints from the Bank of England about negative interest-rates. It found itself “pushing on a string” in August where it was pumping up the narrow measure of the money supply by around £20 billion or so, But we and by this I mean as individuals and businesses had less demand for money and in fact so much less demand that the total fell. Actually in terms of the specifics it was the financial sector other than banks which drove the fall as what were presumably pension funds and insurance companies wanted £6.1 billion less.
In fact monthly money supply numbers are very erratic so it is better to take July and August together where we see the money supply rose by £25 billion which is still less than the Bank of England narrow money push. Just to complete the set we have what looks like another fall in Velocity or as I prefer to put it a fall in money demand. This is a little awkward as for broad money we are discussing money demand when it is called money supply. A loan only exists when someone or thing asks for it and is approved.
Unsecured Credit
This will also have unsettled the Bank of England.
Net consumer credit borrowing remained positive in August at £0.3 billion. This was a little weaker than borrowing of £1.1 billion in July, which was in line with the average net flow in the 18 months to February 2020. These increases followed net repayments of £3.9 billion per month, on average, between March and June. The annual growth rate fell slightly to -3.9%, down from -3.7% in July: this was a new series low since it began in 1994.
I mean with borrowing of this sort so low how will the banks make a profit! More seriously there is a hint of consumers battening down the hatches from the repayment numbers.
Gross borrowing was £21.3 billion, up from £20.9 billion in July and compared to an average of £25.5 billion in the six months to February 2020. Repayments increased to £20.6 billion from £19.6 billion in July.
In terms of a breakdown in the borrowing it was pretty even this month but as you can see below the pandemic decline has essentially been a credit card thing.
Net borrowing on credit cards was £0.2 billion in August (down from £0.6 billion), while net borrowing of other forms of consumer credit was £0.1 billion, down from £0.5 billion in July. The annual growth rates both remained negative, at -10.4% and -0.9% respectively.
Mortgages
Whoever had the job of presenting the Bank of England morning meeting will have been wise to have started with these numbers today. After all the Governor may have a short attention span and may remember him or her favourably.
The mortgage market continued to show more signs of recovery in August. On net, households borrowed an additional £3.1 billion secured on their homes, following borrowing of £2.9 billion in July. Mortgage borrowing troughed at £0.5 billion in April, and is still a little below the average of £4.2 billion in the six months to February 2020.
A career enhancing vibe can be continued by emphasising this.
The number of mortgage approvals for house purchase continued increasing sharply in August, to 84,700 from 66,300 in July . This was the highest number of approvals since October 2007.
Whilst relegating the next bit to when a liveried bar(wo)man is refreshing the Governor’s coffee cup and thereby distracting him.
but it only partially offsets weakness seen between March and June. In total, there have been 418,000 approvals in 2020, compared with 524,000 in the same period in 2019.
Comment
Today’s money supply data has highlighted a few issues. The opener is that official efforts to raise or reduce the money supply pretty much have to work on the narrow money supply ( we are in an even worse mess if they do not). However by the time we reach broad money other agents are involved such as us and companies and there central banks can find themselves pushing on a string. What they really want to influence is money demand and they will be cheered by the mortgage numbers but worried by the overall ones as well as the consumer or unsecured credit ones.
To make things (hopefully) clearer I have left out the government influence via selling Gilts for cash which depresses the money supply as well as spending more than it receives which expands it. One way of looking at the Bank of England action is offsetting much of the former which we normally look at in terms of keeping bond or Gilt yields low and in some cases negative.
Quite often the law of unintended consequences applies to looking at the money supply as we have 2 issues.
- The numbers if we pick out causative factors do not add up to what we think they should be.
- The leads and lags in the effect of any changes are quite variable.
The concept of unintended consequences will be on the mind of Governor Andrew Bailey today because when he was head of the FCA he acted to REDUCE overdraft rates and you will see why I have put that in capitals as you observe below what actually has been happening.
The ‘effective’ rate – the actual interest rate paid – on interest-charging overdrafts rose by 4.2 percentage points to 19.00% in August. This is the highest since the series began in 2016, and compares to a rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.
Also Silvana Tenreyro is not having a good day as we recall her claim that bank profitability is not affected by negative interest-rates. Tell that to HSBC which is selling a theoretically strong holding for a loss…
In another sign that corporate and retail banking perform well in a negative rate environment, Reuters report that HSBC is about to sell its French biz (formerly CCF) for the hefty price of -500M€. Yes, there is a “-” sign. The book value is +8443m€. (That’s a “+” sign) ( @jeuasommenulle )