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BOE - Weak Money Supply Ups Chance Of Bond-Buying Boost
inspector_monkfish
Posts: 9,276 Forumite
15:58 29Oct09 Weak Money Supply Ups Chance Of Bond-Buying Boost
The Bank of England's Monetary Policy Committee is more likely to boost its bond-buying program next week after weak money supply and lending figures indicated it has yet to achieve a key aim.
The bond-buying program was launched in March, and was intended to boost the supply of money and credit to households and companies, thereby supporting spending and ensuring that the annual rate of inflation remained at the BOE's 2% target.
But according to figures released Thursday, the BOE's preferred measure of the money supply fell GBP14.6 billion in September from August, a decline of 0.9%. That followed a 0.1% rise in August and a 0.4% gain in July.
Coming hot on the heels of data showing the U.K. economy remained in recession for a sixth consecutive quarter in the period from July to September, the figures added to expectations that the MPC could increase its bond-buying program - also known as quantitative easing - when it concludes its two-day monthly meeting on November 5.
"It is clear that money growth is still well below rates needed for a decent economic recovery," said Vicky Redwood, U.K. economist at Capital Economics.
"More QE still looks likely next week."
Following the release of the third quarter GDP data Friday, and the money supply figures Thursday, a growing number of economists now expect the MPC to increase the bond buying program to between GBP200 billion and GBP225 billion from GBP175 billion now.
The program was already been increased twice from its initial GBP75billion.
The drop in broad money supply in September represented a 1.7% three-month annualized fall and a 2.3% rise on the year. The Bank has previously indicated that an annual rate of broad money supply growth of around 6% to 9% would be sufficient.
However, the MPC has recently sent some mixed messages about how it judges the success of quantitative easing, so it's not certain that it will respond to the money supply data by upping its bond purchases.
Having initially highlighted the money supply data as a means of measuring the effectiveness of the policy, MPC members have recently claimed that the policy's main impact has been to make it easier for companies to issue bonds, providing them with an alternative to scarce bank loans.
Corporate bond issuance has increased since the policy was launched. But most U.K. firms can't access the bond markets, and the indications are that they are finding credit hard to come by.
According to the figures released Thursday, M4 lending to companies fell by 3.4% compared to September 2008, while M4 lending to households rose by just 2.0% over the same period. Those were the weakest growth rates since records began in September 1997.
Holdings of M4 by companies rose by 0.5% from August and 1.4% on the year. That marked a pickup in the annual rate of growth for the third straight month. However, the growth of holdings of M4 by households slowed to 0.3% on the month and 2.5% on the year.
More detailed data released by the BOE Thursday showed that net consumer lending rose by a weaker than expected GBP660 million in September, following an upwardly revised GBP911 million increase in August.
But that overall increase disguised significant weaknesses. While mortgage borrowing stood at GBP922 million, consumers repaid GBP262 million in bank loans and other borrowings. It was the third straight month of repayment, and suggests that outside the housing market, borrowing is no longer a support to spending.
Mortgage borrowing looks set to increase, since loans approved for house purchase rose to 56,215 - the highest level in 18 months. But that was still well below the 100,095 mortgages approved in September 2007 when the credit crisis
first hit.
The Bank of England's Monetary Policy Committee is more likely to boost its bond-buying program next week after weak money supply and lending figures indicated it has yet to achieve a key aim.
The bond-buying program was launched in March, and was intended to boost the supply of money and credit to households and companies, thereby supporting spending and ensuring that the annual rate of inflation remained at the BOE's 2% target.
But according to figures released Thursday, the BOE's preferred measure of the money supply fell GBP14.6 billion in September from August, a decline of 0.9%. That followed a 0.1% rise in August and a 0.4% gain in July.
Coming hot on the heels of data showing the U.K. economy remained in recession for a sixth consecutive quarter in the period from July to September, the figures added to expectations that the MPC could increase its bond-buying program - also known as quantitative easing - when it concludes its two-day monthly meeting on November 5.
"It is clear that money growth is still well below rates needed for a decent economic recovery," said Vicky Redwood, U.K. economist at Capital Economics.
"More QE still looks likely next week."
Following the release of the third quarter GDP data Friday, and the money supply figures Thursday, a growing number of economists now expect the MPC to increase the bond buying program to between GBP200 billion and GBP225 billion from GBP175 billion now.
The program was already been increased twice from its initial GBP75billion.
The drop in broad money supply in September represented a 1.7% three-month annualized fall and a 2.3% rise on the year. The Bank has previously indicated that an annual rate of broad money supply growth of around 6% to 9% would be sufficient.
However, the MPC has recently sent some mixed messages about how it judges the success of quantitative easing, so it's not certain that it will respond to the money supply data by upping its bond purchases.
Having initially highlighted the money supply data as a means of measuring the effectiveness of the policy, MPC members have recently claimed that the policy's main impact has been to make it easier for companies to issue bonds, providing them with an alternative to scarce bank loans.
Corporate bond issuance has increased since the policy was launched. But most U.K. firms can't access the bond markets, and the indications are that they are finding credit hard to come by.
According to the figures released Thursday, M4 lending to companies fell by 3.4% compared to September 2008, while M4 lending to households rose by just 2.0% over the same period. Those were the weakest growth rates since records began in September 1997.
Holdings of M4 by companies rose by 0.5% from August and 1.4% on the year. That marked a pickup in the annual rate of growth for the third straight month. However, the growth of holdings of M4 by households slowed to 0.3% on the month and 2.5% on the year.
More detailed data released by the BOE Thursday showed that net consumer lending rose by a weaker than expected GBP660 million in September, following an upwardly revised GBP911 million increase in August.
But that overall increase disguised significant weaknesses. While mortgage borrowing stood at GBP922 million, consumers repaid GBP262 million in bank loans and other borrowings. It was the third straight month of repayment, and suggests that outside the housing market, borrowing is no longer a support to spending.
Mortgage borrowing looks set to increase, since loans approved for house purchase rose to 56,215 - the highest level in 18 months. But that was still well below the 100,095 mortgages approved in September 2007 when the credit crisis
first hit.
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)
(MSE Andrea says ok!)
0
Comments
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TBH I don't see any other choice for the BoE than continuing QE. It's a far from perfect solution but it seems to be the only one they have.
Presumably the Gilt market will be ok with it - 'printing money' when the money supply is falling isn't likely to be inflationary.
The possible outcomes from this don't look very good. The big risks must be either that deflation results from all this (I don't remember UK M4 ever falling before now) or that a metaphorical monetary dam will burst and all this freshly minted money will pour into the economy sending inflation upward quickly (not very likely I grant you but you never know).0 -
When many of us spent ages arguing against the 'kneejerk' reaction that far from being (hyper) Inflationary, the Banks QE program was essential in order to avoid deflation, I doubt anyone in their wildest dreams would have thought that £ 200,000,000,000 might not be enough.
Worrying, certainly but as Gen say's it not just the least worst option we have, it currently is the only option, so they will have to continue with the program.'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
Mr Monkfish, my piscine friend, any idea what proportion of Gilts are held by non-UK based investors?
As I see it, the big risk to the Gilt market is that foreign holders of Gilts get fed up with the falling pound so walk away, pushing up Gilt yields. Further, I believe that foreign Gilt holders have been the ones taking advantage of QE to sell Gilts.
How much longer, given that banks are being forced to buy more Gilts, until the only substantial holders of UK Sovereign debt are UK companies and nationals and the Bank of England?
If that was to happen, what would happen to The City as a financial centre? AIUI, one of the big competitive advantages The City has is no witholding tax so it's advantageous for foreigners to hold UK bonds.0 -
Mr Monkfish, my piscine friend, any idea what proportion of Gilts are held by non-UK based investors?
As I see it, the big risk to the Gilt market is that foreign holders of Gilts get fed up with the falling pound so walk away, pushing up Gilt yields. Further, I believe that foreign Gilt holders have been the ones taking advantage of QE to sell Gilts.
How much longer, given that banks are being forced to buy more Gilts, until the only substantial holders of UK Sovereign debt are UK companies and nationals and the Bank of England?
If that was to happen, what would happen to The City as a financial centre? AIUI, one of the big competitive advantages The City has is no witholding tax so it's advantageous for foreigners to hold UK bonds.
no idea - i shall investigatePlease take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
no idea - i shall investigate
Shouldn't you be covering your Overnight, and then arranging where to go for Lunch ??
You need to prioritise !!!'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
Shouldn't you be covering your Overnight, and then arranging where to go for Lunch ??
You need to prioritise !!!
many many things going on today actually, lunch is unfortunately not one of them (had a goood go yesterday though :beer:;):D), and overnight can wait until 3pm...Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
What a nice narrative, completely incorrect of course.When many of us spent ages arguing against the 'kneejerk' reaction that far from being (hyper) Inflationary, the Banks QE program was essential in order to avoid deflation, I doubt anyone in their wildest dreams would have thought that £ 200,000,000,000 might not be enough.
Nine months before we see effects of £125bn quantitative easing, says Bank of England
The QE programme started in March.
The current monetary effects on the economy are largely a result of the interest rate drops at the back-end of last year and the beginning of this. QE may have started to filter through to debt and equity markets along with uber-prime property in London but that's about it."The state is the great fiction by which everybody seeks to live at the expense of everybody else." -- Frederic Bastiat, 1848.0 -
Mr Monkfish, my piscine friend, any idea what proportion of Gilts are held by non-UK based investors?
As I see it, the big risk to the Gilt market is that foreign holders of Gilts get fed up with the falling pound so walk away, pushing up Gilt yields. Further, I believe that foreign Gilt holders have been the ones taking advantage of QE to sell Gilts.
How much longer, given that banks are being forced to buy more Gilts, until the only substantial holders of UK Sovereign debt are UK companies and nationals and the Bank of England?
If that was to happen, what would happen to The City as a financial centre? AIUI, one of the big competitive advantages The City has is no witholding tax so it's advantageous for foreigners to hold UK bonds.
The BOE currently owns around 20% of issued stock, and the majority of under 2 year to maturity . At 2 recent auctions , no stock was put forward for purchase. Pension funds, Insurance Companies etc are required to hold fixed interest stocks as part of their capital reserve structure. This is a finite amount that can bought on the open market.
So the way forward maybe, is for the Treasury to issue them and the BOE buy them.0 -
What a nice narrative, completely incorrect of course
Which bit, out of Interest ??
a) The bit about QE being required to combat deflation
b) The bit about the knee jerkers expectation of (hyper) inflation
c) The bit about nobody expecting in the wildest dreams that QE might extend beyond even £100 bill, let alone possibly reach the £200 bill or more mentioned in the OP ?
.....other than that, the 'nice narrative' made no other comments or assertions.'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
a. we haven't had deflation:Which bit, out of Interest ??
a) The bit about QE being required to combat deflation
b) The bit about the knee jerkers expectation of (hyper) inflation
c) The bit about nobody expecting in the wildest dreams that QE might extend beyond even £100 bill, let alone possibly reach the £200 bill or more mentioned in the OP ?
.....other than that, the 'nice narrative' made no other comments or assertions.
http://www.bloomberg.com/apps/news?pid=20601087&sid=amtblYhnoLN4Consumer prices are poised to rise faster in the U.K. than in any other developed economy. The inflation rate in Britain will be 2.1 percent this year, compared with 0.3 percent in the euro region and a decline of 0.4 percent in the U.S., according median estimates in surveys by Bloomberg News.
QE will be having an effect at the same time there will be inflationary, not deflationary, pressures from year-on-year increases in fuel and commodities, a VAT hike, NIC increase, 50% income tax rate, stamp duty from £125K+ et al.
b. There is nothing 'knee-jerk' about expectations of inflation, in fact the exact opposite. The vast majority of economists accept the application of the quantity theory of money in the long-run.
c. Initial QE was £125bn, different forms of QE (i.e. more concentrated on commercial debt) in America are far larger as a % of GDP."The state is the great fiction by which everybody seeks to live at the expense of everybody else." -- Frederic Bastiat, 1848.0
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