One of the features of these times is how often economic matters get misinterpreted which sadly is related to the way that the media often simply copy and pastes official press releases. This is true of UK monetary policy right now which has combined my dark side analysis of the Forward Guidance policy of Mark Carney with a relic of the Mervyn King era which was the Funding for Mortgage Lending Scheme. In a rather bipolar fashion the Bank of England has watched markets tighten policy in one area whilst loosening it in another.
The super soar away pound
One of the themes of this blog is being spread across the media today and here is an example from the Financial Times.
Sterling crossed the $1.67 threshold against the dollar this morning, representing its highest level since May 2011.
It was only on Wednesday morning that the Bank of England published its latest Inflation Report. Fears ahead of it, saw the value of the pound briefly dip below US $1.64 but as you can see from the quote above since then it has surged. The pound has also risen to 1.22 versus the Euro and as a counterpoint to the discussions on here about the Euro’s strength the pound has risen against it by 5% over the past year. Of course there has also been a surge against the fast depreciating Japanese Yen of Abenomics when we have made our way to above 170 Yen.
If we move to the trade-weighted index it has risen to 86.02 as of last night’s close. If we look for a comparison it was 79.88 a year ago and at 80.23 the night before Mark Carney introduced his policy of Forward Guidance last August. If we allow for this morning’s rally too the pound has risen now by the equivalent of a 1.5% rise in the base rate. This has been the basis of my argument that whilst the media headlines proclaim looser monetary policy via the “lower for longer” mantra of Forward Guidance in fact it has tightened.
One welcome effect of this is that there has been an anti-inflationary effect which we should not be surprised has coincided with a fall in the rate of consumer inflation back to its annual target of 2%. If it carries on like it is then it will push inflation lower too. However it will also have an effect on our exporters although fortunately probably not a large one as the record of recent devaluations indicates that they do not seem to be especially price-competitive. Of course, there is also the danger of a situation in the deja vu category where the pound “overshoots” and really squeezes our export sector.
On a personal level, this is why I have not been calling for base rate rises. We have been getting a tightening of monetary policy and I saw a view expressed on twitter by @NicTrades a while ago that the target for the pound was US $1.72 as it was. Somehow it seemed to fit events and so I adjusted my views to allow for a likely further rise in the value of the pound on the foreign exchanges.
Also we have seen rises in Gilt yields (the ten year is 2.8%) and in interest-rate expectations which both have tightened policy.
The UK housing market
Here the Bank of England put the pedal to the metal. When base rates of 0.5% did not achieve the required effect then the Funding for (mortgage) Lending Scheme was added to drive mortgage rates lower. Today the latest report from LSL Acadata has told us the effect of this.
The UK housing market is roaring back to life in 2014 as the recovery continues across the board. Prices are now up 5.2% annually, driving the price for the average home to a new high. ……This boost in sales has seen an air of optimism encapsulate the market.Last month saw the largest rise in sales over the past year, up 67% annually, with transaction levels crucially only 4% below the January average seen in the decade before the credit crunch. This astounding turnaround can largely be attributed to the resurgence of the first-time buyer.
I do not know about you but I find the fact that we seem to have returned to pre-credit crunch levels of activity to be rather chilling. Did we learn nothing? Also I fear that the current group of first-time buyers who are pushing this forwards are in danger of being the cannon-fodder for this phase of economic policy. If we wonder about the effect of Funding for Lending on this well here is a clue.
The wide range of attractive mortgage deals on offer, cheaper rates and wider product choice has been pivotal.
It also appears that the price rises are now general rather than being concentrated around London. If you exclude London from the numbers then the house price rises are running at an annual rate of 3.5%.
The recovery has now been rolled out far and wide, with the good news coming in from more and more Your Move and Reeds Rains branches up and down the country. Price rises have spread to 90% of unitary local authorities – the largest number since August 2010.
However LSL then do get carried away in my opinion and inadvertently critique what is happening whilst cheerleading for it.
Even so, price growth and sales levels are still below their pre-crisis peaks, so we’re still some way from the ill-fated ‘bubble zone’.
Ah yes let’s only have a comparison with an all-time peak! Has nobody told them that real wages have been falling since then? But we get more and the emphasis is mine.
With greater economic prosperity, confidence between banks and lenders has been cemented further which will no doubt fuel the engine of recovery in the months ahead.While similarly first-time buyers are set to swim further across the sea of adversity to secure a home. But it is crucial that both aren’t scuppered and that the Government’s housing plans come to the fore with a continued focus on supply. This will ensure the recovery reaches the finish line and a generation doesn’t get priced out of the market.
I don’t know about you but if I was a first time buyer swimming across a sea of adversity right now I would be thinking of this from the film The Fly.
Be afraid! Be very afraid!
I am also fascinated how raising house prices will stop a generation being priced out of the housing market….
The economy responds
Tucked away in the UK construction release today was this.
The 1.3% annual growth in construction output is almost solely contained within the new housing sector which has increased 10.4% (£2.1 billion) year on year with a small growth contribution from non-housing repair & maintenance of 0.7%.
All other construction work fell as we run the risk of yet another boom-bust cycle. Whilst some growth for the sector is welcome after its sharp decline this hardly looks balanced does it?
The Central London effect
Here are some thoughts on what has taken place here from Knight Frank.
The index has risen 135% since January 2004, when interest rates were 3.75%, the third Lord of the Rings film topped the UK box office and £1 million bought you a two-bedroom flat on the upper floor of a converted building on a garden square in Knightsbridge.Today, £1 million would buy a basement level studio flat on the same square.
Or if you want a longer perspective then there is this.
The prime central London index began as a quarterly benchmark in June 1976, when interest rates were 11.5% and The Omen had just been released in UK cinemas. Since then the index has risen by a factor of 60 with the Mayfair district leading the way. A Mayfair house worth £345,186 (the current London average) in 1976 would now be worth £23.6 million.
Sixty?
Comment
On Wednesday the Governor of the Bank of England offered his own critique of the current UK economic situation.
Fourth, we’ve learned that as yet the recovery is neither balanced nor sustainable. A few quarters of above trend growth driven by household spending are a good start but they aren’t sufficient for sustained momentum.
The catch is that it is the policies of the Bank of England that have driven this! Whilst it has now ended many of the incentives for mortgage lending this is happening just as the Help To Buy scheme is ready to take up the slack. So the housing market retains official support as even the Bank of England seems now to be wondering whatever happened to the promises of rebalancing?
via:http://www.mindfulmoney.co.uk/wp/shaun-richards/dear-bank-of-england-you-have-encouraged-the-unbalanced-economic-growth-you-criticise/Weak world demand and the appreciation of sterling will hold back the expansion of net exports.
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