This week will see the anniversary of the Bank of England decision to open the credit and monetary taps to the UK economy. It did so in a panicky response to the EU leave vote and the consequent rather panicky business surveys. It was afraid of an immediate lurch downwards in the UK economy along the lines of the recession and 1% contraction expected by its former Deputy Governor Sir Charlie Bean. Of course that did not happen which if you look at Charlie’s past forecasting record was no surprise but the UK economy was left with a lower interest-rate, an extra £70 billion of QE ( Quantitative Easing) plus a bank subsidy called the Term Funding Scheme which currently amounts to £78.3 billion. As I pointed out at the time this was in addition to the boost provided by the lower value of the UK Pound £ which in spite of a rally to US $ 1.31 is still equivalent to a Bank Rate cut of 2.75%.

The problem with boosting credit in that manner is that it invariably turns up in all the wrong places. Last week I pointed out the extraordinary way that Alex Brazier of the Bank of England blamed the banks for this whilst forgetting the way the Bank of England lit the blue touch-paper with what it called at the time its “Sledgehammer” of monetary easing. What did they expect the banks to do? Now it is looking into the consequences of its own actions according to The Times.

The Bank of England is demanding detailed information from high street lenders on how they approve loans after sounding the alarm over the consumer borrowing binge.
Within five weeks, banks must provide evidence of how they assess the financial position of their riskiest customers.

The FCA and car loans

The Financial Conduct Authority ( FCA ) has apparently heard a rumour that there may be trouble in the car finance market. Here are the details from this morning’s release.

The majority of new car finance is now in the form of Personal Contract Purchase (PCPs), a form of Hire Purchase. The key feature of a PCP is that the value of the car at the end of the contract is asssessed at the start of the agreement and deferred, resulting in lower monthly repayments.

If we move onto the dangers it tells us this.

The Prudential Regulation Authority notes that a PCP agreement creates an explicit risk exposure to a vehicle’s GFV for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.

All lending scandals involve “an inadequate assessment of affordability” and a “lack of clarity for the consumer” don’t they? This is of course one of the ways the credit crunch began. Anyway there seems to be no apparently hurry as regulation continue to move at the speed of the slow train running of the Doobie Brothers.

We will publish an update on this work in Q1 2018.

It is also concerned about high cost credit too.

The FCA also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors.

I am no expert in this area but did notice Louise Cooper posting a link to this.

This represents a typical cost of using a Very Account.

Representative 39.9% APR variable

So only 39.65% over the Bank of England Bank Rate. But the FCA train runs with all the speed of Southern Railway.

Today’s data

We see that overall unsecured or consumer credit continues to grow strongly.

The flow of consumer credit fell slightly to £1.5 billion in June, and the annual growth rate ticked down to 10.0%

I will leave the Bank of England to decide whether this is a triumph and therefore due to its actions as it claimed for a while or a problem and the fault of the banks as it has said more recently. Its rhetoric may be having some effect as the main banks did cut their monthly lending from £921 million to £324 million. As this is an erratic series that may be a quirk of the data so I will be watching in subsequent months. But the fundamental point is the gap between the annual growth rate of 10% and economic growth (0.5%) or indeed real wage growth which is currently negative. Also the total amount of consumer credit had a big figure change as it rose to £200.9 billion in June.

If we move to the wider money supply there are issues too as aggregate broad money and lending annual growth was 5.3% in June. Whilst that is seemingly slowing it is a long way above the 1.7% annual GDP growth of the UK economy. The rough rule of thumb is that the gap is a measure of inflation or monetary stimulus and if allowed to persist invariably ends up with the sort of consumer credit problems we are facing now.

Meanwhile the stimulus was of course supposed to be for the purpose of boosting business lending to small and medium-sized businesses. If we look at that we see little sign of any great impact.

Loans to small and medium-sized enterprises increased by £0.4 billion, a little higher than the recent average.

The annual growth rate at 1.2% is even below our rate of annual economic growth. Do businesses no longer want to borrow from banks ( and if so why?) or are banks still unwilling to lend to them?

Comment

When it votes on Wednesday on UK monetary policy ( it votes then and announces on what is called Super Thursday) the Bank of England has much to consider. Firstly the way it flooded the UK economy with more QE and monetary easing and the consequences which are becoming ever more apparent. It pushed both unsecured credit and inflation higher just when the UK economy needed neither. The previous PR campaign that this was a recession averted was weak and has now been replaced by blaming the banks which of course were following the central bank’s lead.

Meanwhile the inflation it created has in one sense come home to roost. From the Guardian and the emphasis is mine.

The Bank of England will hold last-ditch talks with the UK’s largest trade union on Monday as the central bank attempts to avert its first strike in 50 years.

The stoppage has been called over a below-inflation pay offer to the Bank’s maintenance, security and hospitality staff, and was originally due to begin on Monday.

Meanwhile this was announced last week.

to appoint Sir David Ramsden as Deputy Governor for Markets and Banking at the Bank of England.

There are two main issues here. The first is that the “Governor for Markets and Banking” role invariably goes to someone who has no experience or much apparent knowledge of them.  The next is related to the first as Sir David ( the existing knighthood is also worrying) comes from HM Treasury which means that all 4 Deputy Governors comes from there now. What was that about inclusive recruitment again? Perhaps his replacement at the organisation below could look into this.

In January 2013 he became Chair of the Treasury’s Diversity Board.

Anyway he will be a busy chap.

Dave will also be a member of the Monetary Policy Committee, the Financial Policy Committee, the Prudential Regulation Committee and the Court of the Bank of England.