Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.
This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.
Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.
Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.
But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.
The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down
But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.
Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.
This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $ 1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.
These are some of the issues that the MPC will debate in the coming months.
So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.
The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit
Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.
BOJ HARADA: NOT PLANNING TO REDUCE ETF PURCHASES UNTIL 2% INFLATION TARGET ACHIEVED – DJN
So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.
I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.
Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.
Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.
Loans to small and medium-sized enterprises were broadly
Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?
Buy To Lets
Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.
There is little sign of a slow down in this.
Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016
I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.
Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.
I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?
The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.
The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.
Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.
Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.
Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.
Indeed he took a swipe at well people like me.
Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.
As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.
Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.