After looking at US auto-loans yesterday attention shifts today to the consequences of the easy monetary policy of the Bank of England. This was where Bank of England Governor Mark Carney regularly gave Forward Guidance about interest-rate rises and then ended up cutting them to 0.25% in Bank Rate terms. We also got an extra £60 billion of UK Gilt (government bond) QE and £10 billion of corporate bond QE of which the former is complete but the latter continues. As ever a subsidy for the banking sector or “The Precious” was tucked away in it and now amounts to some £47.25 billion of cheap funding called the Term Funding Scheme. All this was based on the Bank of England’s grim economic forecasts post the EU Leave vote. How have they gone?

BANK OF ENGLAND MPC’S MCCAFFERTY SAYS DOES NOT EXPECT UNCERTAINTY TO DISSIPATE SOON, BUT HAVING LESS IMPACT THAN PREVIOUSLY FEARED ( @hartswellcap )

BoE’s McCafferty says “We did get it wrong last August” on the forecasts for downturn made after Brexit vote ( @KatieAllenGdn )

In other words they got it wrong again but will he respond to rising inflation with an interest-rate rise?

“I don’t know if I will vote for a rate hike… hahahaha. It will depend on how I feel at the next meeting” ( @SigmaSquawk )

In spite of admitting to being wrong he appears unwilling to put right his mistake and as he was one of those considered to be most likely to be willing to do so the UK Pound £ fell below US $ 1.25.

Unsecured Lending

If we look for a consequence of easy monetary policy we would expect to find it here and regular readers will be aware that I have been warning about this since late summer last year. I warned about unsecured credit growth back on the 29th of September in particular.

The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

How is that going? From this morning’s update.

The net flow of consumer credit was £1.4 billion in February. The twelve-month growth rate remained at 10.5%

So as you can see the UK consumer continues to borrow at what frankly is an alarming rate if you look at the growth in the economy or even worse real wages. Each month we get a hint of slowing ( this month in personal loans) but there were hints of that in January which have just been revised upwards!

Car Loans

Some of the increases above are from the car loan sector so let me hand you over to the Bank Underground blog from last August.

This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses.

This was discussed in yesterday’s comments section and the blog puts it like this.

First, a growing proportion of finance is now provided by the car manufacturers themselves, often through their own finance houses. Intelligence gathered by the Banks’ Agents suggests that these so-called “captive” finance providers have a market share of about 70% of all private new car finance. Second, households increasingly rent their vehicles using Personal Contract Purchase (PCP) plans.

This is another version of the economic world using the rental model which in truth is a sort of back to the future change and it has happened on a grand scale.

Industry contacts of the Bank’s Agents estimate that around two-thirds of private new car buyers now rent their vehicles using PCPs. Under PCP, the car buyer does not initially take ownership of the vehicle, but instead rents it for an average length of typically three or four years.

There are various changes here and let us start with the monetary and economic one.

This change in buyer behaviour has undoubtedly contributed to the sharp rise in new car registrations and the level of consumer debt in the economy in recent years.

This has fed into the economy and boosted economic output and GDP as more cars are bought.

The popularity of PCPs has thus been associated with a shortening of the replacement cycle for private buyers, thereby boosting the aggregate level of consumer demand for new cars.

So far, so good, although where do the old cars go and what happens to them? Is there some sort of graveyard or perhaps lower prices for older cars? We also get a confirmation of my view that the economic world is increasingly rented these days.

A consumer who might never own the car is likely to view it in the same way they view a mobile phone contract, i.e. just another monthly Direct Debit.

The conclusion is that sooner or later there will be trouble.

Those structural changes have: (a) concentrated financial risk in an industry that is especially sensitive to the economic cycle (in contrast to previous cycles when risk had been shared to a greater degree with the household sector); (b) contributed to increased household borrowing, reflected in the very rapid growth of car finance in recent years and a trend towards premium models; and hence (c) made the car industry more vulnerable to negative shocks, including hikes in interest rates, exogenous falls in market prices of used cars, lengthening of the replacement cycle and changes in consumer tastes.

Number Crunching

The UK Finance and Leasing Association or FLA helps out.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer car finance market grew 12% by value and 8% by volume in 2016……The percentage of private new car sales financed by FLA members through the POS reached 86.6% in 2016, up from 81.4% in 2015.

Meaning the Bank of England was behind the times again. In terms of amounts there is this.

£88 billion of this was in the form of consumer credit, over a third of total new consumer credit written in the UK in 2016. £41 billion of it supported the purchase of new and used cars,

Here are the most up to date numbers we have.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 9% by value and 3% by volume in January, compared with the same month in 2016.

On the way we see another hint of inflation in the UK. Oh and should you look at their website I too am unsure why they have a Base Rate at 0.5%.

Business Lending

Back in the summer of 2013 when the Funding for Lending Scheme began we were promised that it was for business lending. In reality we have seen the mortgage market return to positive net lending and for unsecured credit to mimic a hot air balloon. So what about business lending?

Loans to non-financial businesses decreased by £1.8 billion in February, compared to the recent average increase of £0.9 billion . Loans to small and medium-sized enterprises (SMEs) increased by £0.6 billion in February.

If we look for some perspective the annual growth rate is 1.7% overall and 1.2% for SMEs which provides quite a contrast to the household unsecured credit data does it not?

Comment

As you can see the easy monetary policy of the Bank of England has boosted unsecured credit and a lot of it comes from the car loan sector it would appear. So earlier this week it warned about the consequences of its own actions.

UK household indebtedness remains high by historical standards and has begun to rise relative to incomes.  Consumer credit has been growing particularly rapidly.

Is that the same unsecured credit that it has told us is not growing rapidly or a different one? As to the motor industry there are clear worries although so far it assures us there is no problem. From MotorTrader on the 20th of this month.

The used car market is showing “no signs” of cooling down despite the high volume of PCP cars coming back into dealers as part exchanges.

As a last thought has the borrowing been shifted from businesses to the household in the car sector? That fits with the novel below.

Dune

A great novel and are we on the way to its suspensor suitcases?