Why is the “independent” Bank of England feeding a pre-election housing boom?

3rd October 2013 by Shaun Richards

Today opens with yet another sign of institutionalised inflation in the UK as the price of a National Lottery ticket rises from £1 to £2, and those who bought odd numbers of tickets are left in a quandary (especially those who could only afford one). However inflation as recorded by the Office for National Statistics will be unaffected as it does not take account of lottery tickets. Also as the prize payout ratio remains at a lowly 50%, the rise in some headline payouts is taken back by reductions in others. Such a move is the biggest kick in the teeth for those who can only afford one ticket currently and it is plainly regressive. Indeed as lotteries full stop have a regressive element I guess that this is just another sad feature of the times. Or as a reply on twitter has just put it, the price of hope has just doubled.

Oh and in case you were wondering the rise in the Retail Price Index since 1994 has been 73% so the extra 27% of the increase is just that – extra. Please remember that when Camelot (the lottery operator) and its apologists say that this is the first increase etc….

British Telecom

They too are at the institutionalised inflation game, if the email they have sent me is any guide.

From 4 January 2014, we’re putting some of our prices up. Line rental will go up by just 3.5 per cent – from £15.45 to £15.99 a month.

Also I note that prices not quite so headline seem to be going up at an even faster rate.

Calling features will increase up to 6.5%.

The Bank of England

We have been subject to a flurry of speeches by members of the Monetary Policy Committee over the last week. They are hurrying to explain how the idea of forward guidance occurred to eight of them simultaneously just as a new Bank of England Governor, who is a fan of it, arrived. What a coincidence! Or how weak and easily led they all are. One subject missing is why they had not thought of it before?

Added to this, no doubt, they wish to bathe themselves in the reflected glamour of the current improvement in the UK economy. Unfortunately those who have followed their efforts in the grimmer period preceding this will recall their constant siren call along the lines of this from Shaggy.

It wasn’t me

Apparently now it was!

Paul Fisher gives us his thoughts

Dr.Fisher first updated his audience on recent financial events and there were a couple of somewhat bizarre statements.

A mini-crisis in Cyprus had been dealt with, without too many spillovers.

Er dealt with? You could say that July’s industrial production figure of 86.1 compared to the 98.7 of July 2012 representing a 12.8% annual fall has dealt with it! But somehow I suspect that this is not what he meant. The poor woman who lost much of the proceeds of her house sale would be unlikely to agree. Those much nearer to home reviewing the problems at the Co-Operative Bank and worrying about “bail-ins” ,which some bondholders argue is already happening, will not agree either.

Also with much of the US government in shutdown mode with for example tomorrow’s non-farm payroll report postponed it may not have been the best time to say this.

The US ‘fiscal cliff’ at end-2012 had passed by with some relief

It did not take long for it to re-emerge did it?

Forward Guidance

Dr.Fisher rather ties himself in a knot here and the emphasis is mine.

It is important to remember that monetary policy is about decision making under uncertainty. Considerable uncertainty. Policy makers get surprised by economic developments just like everyone else,

Actually if you look at the appalling forecasting record of the Bank of England policymakers like Dr. Fisher “get surprised” as he puts it a lot more often than others. In fact life must feel full of surprises at the Bank of England. Those who recall when both official measures of inflation went above 5% in the autumn of 2011 may also recall that the Bank of England was forecasting in the August 2009 Inflation Report (the policy horizon) that it would be less than 1.5%!

Somehow the promises of a group of people with a track record that includes not being able to see their nose let alone the end of it has this effect according to Dr.Fisher.

The important thing is to get the message across to businesses and households about what the outlook for monetary policy really is.

It’s a case of so far, so good, on that front

He seems to be handling that particular ball with all the current aplomb of England goalkeeper Joe Hart.

The Funding for Lending Scheme (FLS)

If you think that Dr. Fisher is muddled and confused on the subject of forward guidance wait until you see his views on FLS. Although his opening effort is more revealing than perhaps he realises.

Our first objective was to reduce bank funding costs – and this phase has been remarkably successful

I rather suspect that he did not intend to say so openly what critics of the scheme such as me have argued all along! It is a bankers’ paradise to misquote Coolio who if he wishes to bring his song up to date might like to try this.

We keep spending most our lives
Living in the Banksta’s Paradise

Tell me why are we so blind to see?

Dear Chancellor look what we have done for your re-election plan

On average we’ve seen rates on two-year fixed rate mortgage products come down by around 110bps since the FLS was announced, and floating rate mortgages by a bit less (around 60bps) (by bps he means basis points so 1.1% and 0.6% respectively).

I guess this is being reflected in the higher mortgage approval numbers we saw released earlier this week. Also in this from the Halifax Bank of Scotland today.

House prices in the three months to September were 2.0% higher than in the previous quarter…………… Prices in the three months to September were 6.2% higher than in the same three months last year.

One place where Dr.Fisher and his colleagues can be sure of a warm and friendly reception is at Number 11 Downing Street. Perhaps somewhat better than just beer and sandwiches.

What about lending to businesses?

This was supposed to be the modus operandi for the FLS. Indeed it was supposedly further improved in April in this area as this from the Chancellor of the Exchequer pointed out.

This is a big boost for the small and medium sized businesses that are at the heart of the British economy.

So interest-rates for businesses have fallen like mortgage rates? Apparently not according to Dr.Fisher.

It’s harder to measure what has happened to lending rates to businesses

So not down then, but lending must be up after the big boost?

You sometimes see the phrase ‘the banks are not lending to SMEs’. That is simply not true when you look into the details…….. But the data we do have suggest that since the launch of the Scheme, gross lending to SMEs has been around £40bn

Oh wait a minute we have forgotten something rather inconvenient.

although repayments have been slightly higher (than the £40 billion)

So  we observe that down is as so often these days the new up. Dr.Fisher tries to cover it up with some waffle.

Within that aggregate picture there are many individual banks which have expanded their net lending to SMEs whilst others have contracted

It is a bit like a football manager praising his team for scoring two goals and hoping that nobody will notice that they conceded four.

Oh and it seems that “slightly”, “mixed picture” and “harder to measure” will be finding their way into my financial lexicon for these times.

Perhaps Dr.Fisher might have spoken to the Bank of England’s own Agents who keep reporting things like this.

But for small businesses with few assets or those operating in riskier sectors, the availability of bank finance remained tight

Comment

The UK economy has entered into an apparent stronger phase as this week’s series of purchasing managers indices have reinforced. Today’s reading for the services sector of 60.3 indicates very strong growth although such measures do tend to exaggerate at times like this. Whilst we should welcome an apparent improvement there are genuine fears about the way things are developing and this has been illustrated this week by the numbers from our housing and mortgage sectors. We have been down such a sugar dependency road before and look where it led us. The “independent” Bank of England was supposed to lead us away from that road whereas it keeps signposting us back to it.

Also we have come across an unintended beneficial side-effect of the Funding for Lending Scheme as was pointed out to me recently by Francis Coppola. It gives us a warning signal for banking institutions in what Taylor Swift called.

Trouble, trouble, trouble

The answer to the question you are no doubt asking is the West Bromwich Building Society. Not for some of their borrowers the mortgage rate cuts boasted about by the Bank of England. From the BBC.

Some 6,700 landlords who hold buy-to-let tracker mortgages with the West Bromwich Building Society face a two percentage point rise on 1 December.

But then we live in an era where ever more often some animals are more equal than others don’t we?

 

 

 

 

 

 

30 thoughts on “Why is the “independent” Bank of England feeding a pre-election housing boom?”

  1. Max says:

    How sad that we are governed by the morally bankrupt and clueless fools that we are. They would get a lot more satisfaction in life by trying to maintain monetary stability and not stoking all these buying frenzies.

    At least all the BTL investors are getting richer and richer at everyone else’s expense and better still, their debts are even more guaranteed by the taxpayer than ever before. Osborne for the gallows anyone? This surely is treason.

    1. Anonymous says:

      Hi Max

      Also the underlying outlook for savers gets worse as when the bubble inevitably bursts we know that the the debtors will be bailed out. This only leaves one set of likely losers and some form of bail-in for them.

  2. Justathought says:

    Hi Shaun,

    It seems to me, the actual game is to create huge storms into tiny teacups like presently with the government shut down in the land of the “free”.

    It’s all about be”LIE”ving…

    1. Anonymous says:

      Hi Justathought

      Keep us unstable with worries aplenty you mean? Or at least give the media something to chase so that they miss the bigger fish….

      1. Justathought says:

        Hi Shaun,

        For the one who are most aware and have developed some critical thinking (my assertion is 3 to 5 % of the population) = “Keep us unstable with worries a plenty” and for the rest of the population = “give the media something to chase so that they miss the bigger fish”…. I would love to be challenge on my assertion…I am afraid I might not be far off …

  3. anteos says:

    Hi Shaun

    great article as always. Whatever happened to the temporary SMI scheme? Its still going AFAIK. Looks like another temporary measure has become permanent. The sad thing is (the last time I checked), is that most of the recepients appear to be pensioners, people who should have long paid off the mortgage.

    There was a slight bit of good news today, for savers:

    http://www.theguardian.com/business/2013/oct/02/mark-carney-warning-interest-rates

    potentially a shot across the bows for the lovers of zirp? Or is it a case of watch what they do, and not what they say.

    1. Drf says:

      Hi anteos,

      It is only “words”; they cannot do it because of the dire government debt! If they did raise base rate they would have to get money for the government to service its debt from some other gambit. Not many left now!

      1. forbin says:

        still comes down to the Banks gambled and we lost

        no change in the banking laws

        the realization that the Emergency 0.5% interest rates are here to help the banks – still!!

        And our Gov is ,as you say, completely bust if the base interest rates rise ( NOTE : interest rates for the proles are far higher )

        And the Wozzacks up top are being paid highly for the privilage of it all – Gah!

        Forbin

        PS: its not as if you could vote them out either , all parties as well support the current regime !

      2. Anonymous says:

        Exactly – watch what they do not what they say. Carney especially. He clearly loves PR with all the crap about Jane Austin on a bank note. Totally pointless but apparently bought him a lot of goodwill with the infantile press.

    2. Anonymous says:

      Hi Anteos

      So in addition to his guidance that base rates will be lower for longer Mark Carney is now talking about them going up. Doesn’t that work against the strengths of FG that Dr.Fisher was discussing in his speech. What was that about joined-up thinking?

      Also Mark Carney has now covered every base…

  4. Joe says:

    I’m not normally one to be an apologist, but to be fair to the National Lottery, if you’re going to say that they’re now raising tickets by above inflation, you have to also say that for 18 years they’ve raised it by less than inflation.
    Not like BT of course, who raise prices every year, and usually by more than inflation. It’s especially galling when most people nowadays only need a landline for broadband access, and the line rental costs more than the ISP.

    1. Anonymous says:

      tooway satellite internet is available from £25 per month, no bt line required. It’s quick and works anywhere, even Bulgaria 🙂

      1. Joe says:

        True, but latency is a major issue with satellite.

        1. Anonymous says:

          true, but it’s better than any local alternative and I get good skype video calls.

    2. Anonymous says:

      Hi Joe and welcome to my part of the blogosphere.

      You make a fair point. But some price rises and individual inflation rates are lower than others by definition. However the list of them is rather thinning out over time is it not?

  5. Mike from Enfield says:

    Hi Shaun,

    From the start, Paul Fisher’s sentence about Cyprus has so much wrong with it that you almost have to admire it. The rest of his thoughts…well they really don’t require further comment, do they?

    If you are not already angry by what this guy comes out with then you may wish to visit the BoE website where it tells you how much we are paying this clown. Though in the world he lives in he probably thinks a couple of hundred grand a year plus “expenses” plus a guaranteed inflation-proofed 2/3 pension counts as frugal.

    1. Anonymous says:

      Hi Mike

      Don’t forget his share of the performance-related “bonus” pool which at an average of 6% of salary would add another £11,200. We do not get told what he got although I am sure that there are some strong suggestions out there!

  6. Anonymous says:

    Shaun,
    My elderly Mother has just received a letter from BT explaining that “free weekend” call plan is now to cost £3.50 per month along with the line rental increase.

    1. Anonymous says:

      Hi Chris

      So “free weekend” now goes into the financial lexicon for these times too. It has been quite a busy day for it!

  7. Anonymous says:

    Great column, Shaun. The
    forward guidance document released by the BoE in August said that “in order to ensure
    that the risks to price stability remain contained, the Committee’s intention
    not to raise Bank Rate above 0.5% also applies only if medium-term inflation
    expectations remain consistent with the 2% target.” I noticed that in Mr. Fisher’s speech, this second knockout becomes: “if medium-term inflation expectations no longer remain sufficiently well anchored”. There is no reference to 2%. It seems that Mr. Fisher recognizes that the 2% target is an embarrassment to the BoE when the three- to five-year expectations are running at around 3½% so he is walking away from it. Two percent no longer seems to be the target rate of the BoE in any meaningful way.

    1. Anonymous says:

      Hi Andrew

      It has not been for quite some time now. I would not be surprised to see a formal effort to raise it, but not for a while as for the moment we have a boomlet and slowing albeit above target inflation. Petrol and diesel prices have dropped at the pump over the last week too. But they will be along in the end…

  8. Rods says:

    Hi Shaun,

    Another excellent hard hitting blog, where you are targeting the BOE and their normal misinformation. What makes it so unforgivable is that this propaganda is carefully (and badly) planned where they not only contradict their own and others economic figures but also themselves, not just from speech to speech but from paragraph to paragraph! Where their economic forecasting with the correct application of the economic accelerator and brakes at the correct time with the correct amounts has been missing for all of the 21st century, all of this must call into question whether they have the most basic of competences. This is a problem that is endemic this days in far too many public institutions, where all too often they are run as a means to an end for themselves, while they pocket large salaries and build enormous pensions, which are well beyond what can be achieved with private pensions, with their ever decreasing caps.

    To me the 2015 election is dictating the quest for a housing boom, which all too easily can turn into a housing bubble. With how society has changed, I think with the current shortage of property especially in London and the South East, we will see prices rise until the average price is at least 3.5 times joint salaries or 7 times a single persons. The only positive from this will be more house construction which is badly needed for easing the chronic shortage of houses.

    BTL consistently gets a bad press, but many people these days are looking for a lessor rigged market than shares, bonds and annuities and a hedge against inflation along with it providing retirement income, which is why I think it is currently so strong amongst the middle aged as part of their retirement plan.

    I wonder how hollow Mark Carney words will be in warning people to not overstretch themselves financially when interest rates go up as most people do find money in short supply for a few years after buying their first or trading up to a bigger property, where the costs of moving are expensive so it is something we all want to do as few times as possible.

    1. forbin says:

      Let me re-phrase part of your critique to be more apt

      “… This is a problem that is endemic this days in far too many BANKING
      institutions, where all too often they are run as a means to an end for
      themselves, while the CEO pocket large salaries and build enormous
      pensions, which are well beyond what can be achieved with private citizen …. ”

      There , much better !

      Forbin

      1. Noo 2 Economics says:

        Hi Forbin,
        Given that most banks are publicly owned and operate in identical ways to the civil service then Rods’ original piece applies I should say.

        Not a swipe at you but this is a reminder that nowadays the dividing line between private/public sector is very very blurred.

    2. Anonymous says:

      Hi Rods

      In effect the government is pushing buy to let as a investment and retirement plan by the way it sets policy such that it is almost impossible to lose! What could go wrong?

      In itself B2L is not evil it is the way that it is prioritised over more productive enterprises which heads that way….

  9. Anonymous says:

    That was in the Hunter S Thompson style!

    Sean – is any of the SME lending actually BTL “businesses”?

    1. Anonymous says:

      Hi Progrock

      This was a suspicion since the rules were “improved” for SMEs in April which seemed to let corporate Buy to Lets in. Just checking online there are one or two things which make me suspicious with promises of tailored rates and one similar to residential lending. But of course that could just be hype….

      1. Anonymous says:

        Interesting, ok let us know if you find anything. That really would take the biscuit.

  10. Paul C says:

    Shaun,
    You are correct to highlight money and house prices. Given the decline of our nation’s productive capacity, only printing money and bidding up the existing stock can pass for “growth”. I have noticed shortage triggered price-rises in construction materials, after 5 years of continuing construction shrinkage (even with Olympics) the retiring workforce and decimation of sub-contractors means it will take 2-3 years for the industry to even get back on its feet. There is only the printing of money and bidding-up of property to the done, these are the only 2 games in town.

    BofE prints, high street bankocracy distributes, young and ignorant sign-up for penury. Existing owners bask in glory….The system is preserved as we know it…

    Is it reasonable? Is it fair? Is it economics?

  11. Eric says:

    Looks like we’re going round the houses one more time, Shaun. Or as Maxine Nightingale said – Get right back where we started from …

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