UK Bank Rate is 0.1% but quoted overdraft rates are 33.5%

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by Shaun Richards

After yesterday’s effect which is the surge in house prices of the order of 10% per annum we can move onto a cause today. This is the monetary expansionism of the Bank of England. It was in play as we noted the way that mortgage availability was arriving again for those with low deposits or equity. That is partly due to the way that the taxpayer has been dragged in to back them under the government scheme. But also there needs to be cash/liquidity in the banking system. The Bank of England made sure of this with its announcement of a new Term Funding Scheme when the pandemic hit, meaning that banks would not have to rely on pesky depositors and savers for liquidity. If we add the new scheme to the existing one we see that it amounts to £110.5 billion which even in these inflated times is a tidy sum.

Rather awkwardly in some ways the deposits flowed in anyway as a consequence of the furlough schemes.

Households continued depositing significant amounts, with an additional £16.2 billion placed in March. Deposit interest rates remained at historically low levels. ( Bank of England)

As you can see by the mention of deposit rates the banks did not have to compete for the money it just arrived in a sort of Dune style the spice must flow. So now the banks have the centrally planned liquidity and the furlough driven deposits in a collision of central planning. This means that downward pressure has been applied to interest-rates just as the Bank of England is looking to keep them out of negative territory, for now anyway! I point this out because the US is presently struggling with this and is seeing some interest-rates heading too low for zero.

Also we see the media allowing central bankers to mark their own homework. Here is BBC economics editor Faisal Islam allowing the Bank of England to do just that.

NEW Bank of England Dep Gov John Cunliffe in BBC interview says “we’re watching very carefully” housing market developments saying “I think what we’re seeing in the housing market at the moment is being driven mainly by the tax holiday”

There is no mention of the policies the Deputy Governor has consistently voted for. Another example of this sort of thing came from the ECB which published a 64 page working paper knowing the vast majority would only hear about or read this bit.

According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so.

In some ways the most amazing part of that is claiming an effect for Forward Guidance or FG. I also note that they seem to have dropped the claims about GDP. Also most consumers and workers will be wondering exactly how higher prices have benefited them?

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Mortgages

This morning’s Bank of England release has brought signs of another collision between government and Bank of England policy.

Mortgage borrowing fell back in April. Individuals borrowed an additional £3.3 billion secured on their homes, following a record £11.5 billion in March . This was also lower than the £5.7 billion monthly average borrowed in the six months to February 2021.

This relates to the cliff edge for the Stamp Duty suspension although that in the end got an extension for many until June. Many had already made their plans as you can see from the March numbers. The approvals numbers suggest that the new message did get through in April.

Approvals for house purchase ticked up in April, to 86,900, from 83,400 in March. They have fallen from a recent peak of 103,400 in November, but have remained relatively strong. In February 2020, there were 73,400 approvals for house purchase.

After a period of rising mortgage rates the Bank of England will be pleased to see a decline.

The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages fell 7 basis points to 1.88% in April. That is marginally above the rate in January 2020 (1.85%), and compares to a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained broadly unchanged at a series low of 2.07%.

For those wondering that does coincide with my leading indicator for this which is the five-year Gilt yield which did dip in April and hints at a nudge higher for May. The latter is more vague because bond yields have gone quieter although in an example of the way percentages can be both accurate and misleading it is up 784% on a year ago.

Unsecured Credit

There had been hints from the banks that credit card borrowing was turning but as you can see not in time for April.

Individuals have made significant net repayments of consumer credit since March 2020 . The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion). As a result, the annual growth rate – while remaining weak at -5.7% in April – rose from -8.8% in March.

Within consumer credit, the repayment in April was concentrated in credit cards (£0.4 billion).

In essence it has been credit card borrowing which has dropped. If we look at the interest-rates I think we can see why.

The cost of credit card borrowing fell by 31 basis points to 17.70% in April. Rates on new personal loans to individuals, in contrast, increased by 62 basis points, to 5.65% in April, compared to an interest rate of 7.03% in January 2020.

Personal loans require more legwork and in some senses commitment via a set term but are considerably cheaper.

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Deposits

I had already noted the surge here and whilst it is past its peak it continues.

Households deposited an additional £10.7 billion with banks and building societies in April. This was the smallest net flow since September 2020 (£7.4 billion) and compares to a net flow of £16.1 billion in March 2021. The flow remained strong relative to recent years, however: in the 6 months to February 2020, the average monthly net flow was £4.6 billion.

Money Supply

They are continuing to pump it up for example via QE bond purchases of which there will be another £1.15 billion this afternoon.

Sterling money (known as M4ex) increased by £11.6 billion in April, down slightly from £12.4 billion in March. Households’ holdings of money continued rising strongly with net flows of £10.7 billion, and PNFCs’ holdings (on a seasonally adjusted basis) increased by £2.3 billion, up from £1.2 billion in March.

The annual rate of growth continues to dip because we are comparing now to the beginnings of last year’s surge but is still 10.9%. The total is now £2618 billion.

Comment

The concept of monetarism is very out of fashion at the Bank of England. Indeed the money supply itself has not got a mention for some time. Curious when you consider that they have done this to it.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

I think that they are afraid of any discussion which will inevitably develop into one how about how much economic growth and how much inflation it will cause? Yesterday we saw one example of inflation it has contributed too although it is kept out of the official inflation measures. Think of that, excluding what is for many the largest purchase they will ever make.

Also whilst we officially have effectively zero official interest-rates ( strictly 0.1%) many face rather different ones to that. As I have pointed out via the TFS The Precious! The Precious! has got lots of cash at 0.1% and the government continues to borrow at what are historically low rates. But others we have already seen pay double-digit interest-rates in an example described by Pink Floydi in Us and Them.

Forward he cried from the rear
And the front rank died
And the general sat
And the lines on the map
Moved from side to side

The most extreme example is to be found in overdraft rates which are quoted at 33.5% after an intervention from Governor Andrew Bailey which deserves its own episode of The Thick of It. When he was head of the Financial Conduct Authority his attempts to cut overdraft rates doubled them for many.

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