The Bank of England will be vigilant in its efforts to ignore house price rises

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by Shaun Richards

This morning has been one where a little known committee has emerged blinking into the spotlights. It is the Financial Policy Committee (FPC) of the Bank of England and just to prove that they are central bankers they got straight to what is the beating heart of their concerns.

he UK banking system has the capacity to continue to provide that support. The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the interim results of the 2021 solvency stress test.

We have learnt to be more than suspicious about the use of the word “resilient” especially after noting how across the Irish Sea what was labelled the best bank in the word suddenly collapsed in the credit crunch.  As so often it was time to throw The Precious a bone.

The FPC supports the Prudential Regulation Committee’s (PRC’s) decision that extraordinary guardrails on shareholder distributions are no longer necessary, consistent with the return to the Prudential Regulation Authority’s (PRA’s) standard approach to capital‐setting and shareholder distributions through 2021

How many civil servants does it take to let the banks pay dividends again? As you can imagine it has gone down well with bank shareholders.

Whilst they are there I guess they felt they also needed to help keep the lending taps open.

To support this, the FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Due to the usual 12‐month implementation lag, any subsequent increase would therefore not be expected to take effect until the end of 2022 at the earliest.

What about the real economy?

Some businesses have been hit hard.

The increase in indebtedness has not been large in aggregate, but has been more substantial in some sectors and among small and medium‐sized enterprises (SMEs)…..companies with weaker balance sheets, particularly in sectors most affected by restrictions on economic activity and SMEs, may be more vulnerable to increases in financing costs.

But it is not going to worry about them because others have not.

UK businesses’ aggregate interest payments as a proportion of earnings did not increase over 2020, and are around historic lows.

Such statements can hide a lot of woes especially for businesses where earnings have been hit hard.

As to households things are not as bad as when things collapsed last time.

The share of households with high debt‐servicing burdens has increased slightly during the course of the pandemic, but remains significantly below its pre‐global financial crisis level

Pumping up house prices was one of the few things we could do.

House price growth and housing market activity during 2021 H1 were at their highest levels in over a decade, reflecting a mix of temporary policy support and structural factors.

We need to find a way that people can borrow even more.

However, so far, there has only been a small increase in mortgage borrowing relative to income in aggregate, and debt‐servicing ratios remain low.

It has been good to see that low equity mortgages are back but in case that backfires again we had better cover ourselves.

The FPC’s mortgage market measures are in place and aim to limit any rapid build‐up in aggregate indebtedness and in the share of highly indebted households. The FPC is continuing its review of the calibration of its mortgage market measures.

Markets

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This is an awkward area for central bankers. After all their main policy lever these days is pumping up asset prices via purchases of government bonds. The Bank of England will do another £1.15 billion of that this afternoon. So we get this sort of buck passing statement.

Risky asset prices have continued to increase, and in some markets asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ in a low interest rate environment, and higher risk‐taking.

Ah the very yields the central banks have set out to take away! This is also why those who set interest-rates and have previously been so busy cutting them are always in a rush to blame secular trends. It wasn’t their fault you see. Of course if it had worked it would have been their triumph.

It gets worse in the next bit. The Bank of England piled into the Corporate Bond market in spite of the fact that previously it had got into a mess in doing so. This is because UK businesses of that size are mostly international and thus often choose to issue in Dollars and Euros to match currency risk. Thus the £ sterling market is smaller than you might think and it ended up being like The London Whale in there. Also it was so desperate to find bonds to buy it bought the ones of Apple. Exactly what support did the richest company in the world need? Yet it tries to point put what is below as if it had nothing to do with it.

The proportion of corporate bonds issued that are high‐yield is currently at its highest level in the past decade, and there is evidence of loosening underwriting standards, especially in leveraged loan markets.

Encouraging that was official Bank of England policy. Below is as close to admitting they have stored up trouble for the future as they will ever get.

This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.

Next is even more classic central banker speak which completely ignore their role in creating this.

Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth or inflation, and therefore interest rates.

Even Bloomberg pointed this out last week. What did central bankers think would happen in response to this?

Central banks in the U.S., Europe and Japan have become ultimate market whales during the pandemic, with combined assets of $24 trillion.

Is there any market-based finance left after all their interference?

Any such correction could be amplified by vulnerabilities in market‐based finance, and risks tightening financial conditions for households and businesses.

Many reviewing this will think The Beatles were rather prescient here about QE.

You never give me your money
You only give me your funny paper

Especially if their situation is like this.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go

Comment

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There are a couple of contexts here. I have critiqued the FPC as being a waste of space where people you have mostly never heard of are selected because they have the “right” views. The official view was that the FPC would set macroprudential policies which would keep house prices under control. Remember macropru as it became called? Where are all its supporters now as they seem to have disappeared?

“Over the last twelve months, our index has shown the average price of a home sold in England and
Wales has increased by some £32,500, or 10.7%. If we exclude London from this then the figure is a
very considerable 14%. Nevertheless, even including the capital, this is the highest annual rate since
February 2005. It is now fourteen months since any of the areas in our index have recorded a fall in
house prices, and this is while the UK economy has been under the severest pressure it has faced in
living memory.” ( Acadata)

So where are they then?

Still it looks as though one member has been checking his own position.

BOE’S DEP. GOV. SIR CUNLIFFE: PAYING CAREFUL ATTENTION TO THE RELATIONSHIP BETWEEN HOME PRICES AND DEBT. ( @FinancialJuice )

 

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