UK interest-rates are rising in spite of another money supply surge

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by Shaun Richards

Today brings the opportunity to note how the Bank of England is progressing in its plan to pump up the volume in the UK monetary system. One way of looking at it is to see where at least some of the money is going.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%).

London’s average house prices hit a record high of £496,000 in September 2020.

These moves are really extraordinary as really house prices should be falling by those sort of amounts. After all we have seen a virus pandemic and restrictions on the economy such that economic output is somewhere around 10% lower than at the turn of the year right now. Of course monetary juicing if the housing market has not been the only game in town as we have seen Stamp Duty cuts as well as both the government and Bank of England have acted to stop house price declines. It is notable that prices are rising everywhere and even in London which is a place where people are fleeing if the media are any guide.

As you can see house prices are rising much faster than the official rate of inflation which is why this was announced last week by the National Statistician Sir Ian Diamond.

“The RPI is not fit for purpose and we strongly discourage its use. The Authority’s proposal is designed to address its shortcomings by bringing the methods and data of CPIH into RPI.”

You see the Retail Price Index or RPI has as a component house prices via a depreciation measure and they are around 8% of the index. Can any of you figure out why they want to replace something rising at 4.7% a year with something like this?

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020. ( UK ONS).

Just as a reminder those rents are not actually paid by owner occupiers so it is a complete theoretical swerve as a way of making inflation look lower than it really is. The National Statistician should be ashamed of himself.

If we now switch to another asset market we see another surge as for example the five-year yield has gone negative again this morning. So if we flip that over UK bond or Gilt prices have gone through the roof. The clearest example of that is our 2068 Gilt which was only issued 7 years ago but with a coupon of 3.5% which means it has more than doubled to 211. Bonds should not be doing that as it really rather contracts their role as a safe haven but it is where we are.

Pump It Up!

This is the change seen in October.

Overall, private sector companies and households significantly increased their holdings of money in October. Sterling money (known as M4ex) increased by £29.9 billion in October; a significant rise from September which saw holdings increase by £11.5 billion . This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £40.8 billion on average each month.

The first consequence of this is that the broad measure of the money supply called M4 rose at an annual rate of 13.1%. This is a record for this series which goes back to 1993. It is best to take these numbers as a broad brush as they are erratic on a monthly basis.

There is also a cross over between monetary and fiscal policy here as the rise in savings deposits is probably from the furlough payments and the like.

Households’ deposits increased by the largest amount since May in October (£12.3 billion). This follows a £6.6 billion increase in deposits in September, and an average flow between March and June of £17.4 billion a month.

As an aside there seems to be a shift out of National Savings since it announced interest-rate cuts.

This strength could in part reflect less investment in National Savings and Investment (NS&I) accounts, which are not captured within household deposits, but can be substitutes for one another as they have similar characteristics. There was a small withdrawal (£0.5 billion) from these accounts in October compared with strong investments seen since March, including £5.0 billion in September.


Let me now switch to the part that will be emphasised at the Bank of England morning meeting.

The mortgage market remained strong in October. On net, households borrowed an additional £4.3 billion secured on their homes, following borrowing of £4.9 billion in September….. Mortgage borrowing troughed at £0.2 billion in April, but has since recovered and is slightly higher than the average of £3.9 billion in the six months to February 2020.

Governor Andrew Bailey’s smile will only broaden when it is followed-up by this.

The number of mortgage approvals for house purchase continued increasing in October, to 97,500 from 92,100 in September. This was the highest number of approvals since September 2007, 33% higher than approvals in February 2020 and around 10 times higher than the trough of 9,400 approvals in May.

However the road to the fast track promotion scheme will mean relegating this part to the small print.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages ticked up by 4 basis points to 1.78% in October. New mortgage rates have risen back to their level in June,

Perhaps our junior could emphasise this part.

 but remain below the rate at the start of the year (1.85% in January).

Consumer Credit

This is a more thorny issue and will require some deep thought for the Bank of England morning meeting. Perhaps they could start with the gross borrowing figure although the fact it has been dropped from the press release is not an auspicious sign. Or they could quickly flick up this chart if the Governor takes a toilet break.

Household’s consumer credit remained weak in October with net repayments of £0.6 billion, unchanged from September. Since the beginning of March, households have repaid £15.6 billion of consumer credit. As a result, the annual growth rate fell further in October to -5.6%, a new series low since it began in 1994.

A sub-plot in the Bank of England plan has been to light the blue touch paper on what used to be called unsecured credit but that has come a cropper.

Small Business Lending

For once these numbers look good.

Within overall corporate borrowing, small and medium sized non-financial businesses continued borrowing from banks. In October, they drew down an extra £1.7 billion in loans, on net. SMEs have borrowed a significant amount since May, and as a result the annual growth rate has risen sharply, reaching 23.9% in October, the strongest on record .

Although this is government mandated and no doubt includes the various £50.000 loans which were free (0%). So whilst the numbers look good the reality behind them is grim.


The beat goes on today as the Bank of England will buy another £1.473 billion of UK bonds as it continues its campaign to reduce the UK government’s borrowing costs. A consequence of that aim will be more electronically produced money and a higher money supply. But there is trouble ahead for economics 101 which would assume lower interest-rates as a consequence. We have already noted mortgage rates heading higher and it is variable-rate mortgages which have driven this by rising a quarter point from their low. But there are also others doing the same.

Rates on new personal loans to individuals increased in October by 37 basis points, to 5.15%, but remain low compared to an interest rate of around 7% in early 2020. The cost of credit card borrowing was broadly unchanged at 17.96% in October.

Also there is this.

 Interest rates on new loans to SMEs increased by 11 basis points to 1.83% in October, but remain well below the rate of 3.44% in February. Rates have risen gradually over recent months from a trough of 0.98% in May.

So in spite of the ongoing effort interest-rates are beginning to edge higher again and that is before something from Governor Andrew Bailey’s past catches up with him.When he was head of the Financial Conduct Authority he acted to reduce overdraft interest-rates and yes I did type reduce, because it was botched and look what happened next.

The effective rate on interest-charging overdrafts was 19.70% in October, above the rate of 10.32% in March 2020 before new rules on overdraft pricing came into effect.



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