Supplement 10 Dec 23 – Progress Through Sludge, Financial Stability

Dec 10, 2023

“Live within your income and save so that you can invest. Learn what you need to learn” – Charlie Munger RIP, American investing legend.


Before we begin – if you haven’t seen the Propenomix Advent Calendar because you listen on a podcast platform, it is worth checking out the Propenomix YouTube for the daily posts I’m doing throughout December to celebrate getting to 500 subscribers! Thanks to all the regular readers and listeners who have subscribed……if you haven’t yet, what are you waiting for!? Please can you recommend me to a friend who you think would be interested?


Welcome to the Supplement everyone. The end of the year is approaching, and the 2024 predictions are appearing. I will continue to build the picture throughout the next few weeks, rather than dedicating one particular week to predictions. We have some meaningful macro news yet to react to – one thing we do need to do is a quick western world roundup, because those markets have been cyclically ahead of us since the pandemic, and there are some really interesting clues and reactions to future news that have been absorbed very quickly into the markets. I will then move on to the Bank of England Financial Stability Report, which fits right into my crosshairs whenever it is released.


This week’s macro roundup first of all, though. Retail sales limped forwards, decimated in real terms when you consider inflation with an annual rise of 2.6%. I listened to an interesting podcast this week about the BNPL (Buy now, pay later) market, which has found a way around the credit card rules in the USA, and has seen a huge increase (so huge that the large retailers have decided to “cut out the middle man” and simply offer it themselves – companies like Apple and PayPal, for example). A fairly typical growth market that grows faster than the regulators seem to be willing to keep up with – a little bit like the vaping market, which has had a “free decade” really to grow as it has wanted to. Crypto would also fit into this box, and it is inevitable that when the sector is on another tear upwards (a classic cyclical move, according to those who seem to know what they are talking about), that Bitcoin would creep its way back into the supplement. I’m still unsold on the utility of that particular coin, and so, remain on the sidelines – interested as always, but unable to make any commitment of note – and thus, prefer to stick to spinning all the plates I am already spinning.


New car sales improved again, although were lower than forecast. Last year still has some pandemic base effects which make the annual figure a less than ideal comparable. Still, growth is better than contraction. The services PMI for November (and the resulting composite PMI, which combined manufacturing in line with the size of the manufacturing sector compared to the services sector) improved to 50.9 and 50.7 respectively, well above expectations and forecasts and above the magic 50 threshold. This suggests growth on the services side in spite of increasing wage pressures next year, and is a sign that a brief flat spot should be exactly that, rather than a recession precursor. Still, never take too much heart from one good month. 


The construction PMI was quite the opposite, dropping to 45.5, a small decrease on last month but a big undershoot of the forecasts. Expect continued shrinking of the construction sector as things currently stand, in 2024.


The 5-year gilts, and SONIA swaps, also continued to trend downwards. The 7-year closed the week as the lowest yielding gilt for the first time in some time, just under the 5-year – but not enough to make those mortgages much cheaper than the 5s. Watch this space on that though.


The magic 4% number was broken by both the 5-year gilt AND the 5-year swap this week, at points, and the 5y gilt closed at 3.96% – the psychological boost is considerable. The 5y SONIA at the close was 3.999% – and they say halves only count in horseshoes and hand grenades! Let’s hope there’s more to come – the almost non-existent premium for the 5y swap tells of a continued lack of demand versus supply, and lower mortgage takeup, for sure. Overall, continued good news for rates – or at least, not bad news.


Halifax added their November house price index to the figures, and it showed a 0.5% increase in November (compared to a forecast +0.3%). It seems the forecasters have learned a bit from their overall bearishness and the numbers in the Nationwide report last week. Halifax now see house prices down 1% Year-on-Year, compared to Nationwide’s 2% (and at the lowest points this year, both indices have quoted nearly 4% down and over 5% down, respectively). 


Zoopla’s November report also needs airtime – as discussed, I’ve entered into a greater and greater respect for their efforts as the year has gone on. I had the privilege a couple of months ago to be asked to feature on a panel about the future of the property market in 2024 and beyond, alongside Richard Donnell who is the Zoopla research director. He was featured in an article within the past week that has (surprise!) been taken out of context somewhat, depending on the angle of those reporting on it – it was regarding immigration, and how the record levels of net migration in the past couple of years have of course distorted the rental market.


What Richard says is, of course, tautologically the case. Expecting the vast majority of those who come to the UK (if you were going to generalise, you would likely remove those who have migrated under the BN(O) scheme from Hong Kong since March 2021) to be in a financial position to buy a property – while obtaining credit immediately is still very difficult indeed – would be ridiculous. Of course, they look to rent. Many are going to be urban-based, with some suburban – 84% of the UK’s population in 2022 was classed as “urban”. 


His ACTUAL argument is, effectively, that there has been a triple threat on the UK rental market, one element of which is migration. Student numbers at a net 263,000 are considerable and almost exclusively rent, and are not all accommodated by purpose-built student accommodation. People are also moving for jobs in a strong job market, and that also means renting. He points out that 9 out of 10 migrants are involved in the rental market first of all – and anecdotally, many of the Hong Kong market have been the same as they may well come with enough firepower to buy property initially, but still prefer to find their feet for 12 months in a rental before making a purchasing decision, which is easy to understand on an individual level.


Anyway, Richard’s work also includes a monthly market report and has tended – in my view – to have better real-time cross-geography data than either Halifax or Nationwide – and, whilst Rightmove lists many more houses, Zoopla are far better at translating the data into something meaningful. November’s Zoopla report sees prices down 1.2% year-on-year, which feels reasonable – and contains some more interesting info too.

Firstly, the supply of homes on the market for sale is at a 6-year high. Basically, back to after the market settled after the 2017 election was out of the way. This is significant, although not as significant as a “normal” 6 years would have been – you can effectively ignore nearly 4 of them, after all, as far as a functioning well-supplied resale market goes. Let’s see where it goes from here. 


The average discount to an asking price is 5.5% or £18,000 – a significant number and again, the largest in 5 years. Of course those two points are related, and the previous point also stands regarding putting a line through nearly the past 4 years. A trend to follow.


They also see prices “continuing to fall” in 2024 (after a tumble of 1.2%, whatever will we do next!), but accept that rates falling may well boost the number of transactions. I’m not so sure about this part – traditionally, 2024 should be a tough year for pricing at this point in the cycle, but the past couple of months of activity don’t seem to give too much cause for concern. Also – is this pricing in wage rises at 5-10% next year (depending on where you are in the economic pecking order) – I don’t think it is……


Buyer demand is up 10% compared to last November, but 13% down on 2019. That all feels about right, bearing in mind the country was still reeling from the “governance” of the lettuce, 12 months back. 


Sales agreed however are up 15% on last year, and 5% above 2019. Sellers are seen by Zoopla as “more realistic” – we could also theorize that they have more equity to play with than in 2019, thanks to the pandemic bump in pricing. It all depends on whether they are moving to a new, bigger and better property (in which case a discount is helpful) or downsizing in cash, in which case they might have more headroom than they used to – and thus can afford to take these decisions. It is fair to suggest in this market that most who are moving are more motivated than average, because the taxi driver and the shoe shine boy currently know it isn’t a great time to be selling a house (although it is nowhere near as bad as some seem to be saying).


The sales achieved number is still estimated to hold up at 1 million for 2023. This is only really 10-15% below where an average year would sit – and it seems that this has held up better than anyone thought, but Zoopla were first to the market with the most accurate prediction I’ve read this year. 


Geographically, they break things down and the trend that has persisted this year is ever more evident in the image that I’ve used for today’s graph. The South/South-East/East has suffered with Scotland and areas of the North performing positively. The yield squeeze is of course felt ever more in the South/SE so new purchases from investors there must have been severely curtailed this year, and some of that money will inevitably have gone North rather than sit in the bank. The commuter towns have underperformed inner London, so it isn’t all about absolute price of property.


Zoopla don’t go with an absolute prediction for next year – they simply say that house prices will fall slightly. We part company there – because I see sticky inflation and wages rising, and also rates falling a shade (although that’s already happened a fair bit in the past 6 weeks or so) – and thus I see a small rise in prices by the end of 2024 (But still, cheaper houses after inflation adjustments have been made, let alone wage adjustments). Let’s see what happens.


That leaves us with the Bank of England financial stability report. As a reminder, one of these is published every 6 months, and is not related to the Monetary Policy Committee that meets to set the base rate of interest, and to make decisions around Quantitative Easing/Tightening, which happens every 6-7 weeks (8 meetings a year). There are crossovers in terms of who is on the committee, but both the MPC and the FSC (financial stability committee) have more people only on one of the committees than both.


The report was published on Wednesday this week, although it only uses data up to November 20th. That can be important – although there has not been major volatility since then, there have been periods where that 2.5 weeks would have made a massive difference of late!


My tried and tested methodology will prevail here for summarising it – the entire report is 117 pages, so I will simply line-by-line the executive summary. For readers, the bold type is my commentary – for listeners, I hope you will be able to tell by inflection (and my lack of love for corporate speak normally makes my comments easy to discern anyway!):


The Financial Policy Committee (FPC) seeks to ensure the UK financial system is prepared for, and resilient to, the wide range of risks it could face – so that the system is able to absorb rather than amplify shocks, and serve UK households and businesses. Strange to think this wasn’t in place before 2012, although you’ll understand what triggered it!


The overall risk environment 

The overall risk environment remains challenging, reflecting subdued economic activity, further risks to the outlook for global growth and inflation, and increased geopolitical tensions. Many are challenging ongoing inflation – as you know, I limit myself to the UK although keep a keen and interested eye on the international positions. I found little in Hunt’s budget that was particularly disinflationary, and the economy seems still to lumber on in spite of some good efforts to derail it with high interest rates. I’ll close with some commentary around that. Increased geopolitical tensions though – absolutely true – and subdued economic activity is true simply because of China’s slowdown in comparison to pre-pandemic days, forget everything else!


Long-term interest rates in the UK and US are now around their pre-2008 levels. Or a good percentage point higher, with limited justification for this. The brakes are on.


The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments, which could be amplified by vulnerabilities in the system of market-based finance. We know this to be true from the “debt wall” analysis that has been undertaken in the Supplement previously. 


So far, and while the FPC continues to monitor developments, UK borrowers and the financial system have been broadly resilient to the impact of higher and more volatile interest rates. So much debt was of course fixed as it became obvious that rates were on the climb, and that has prevented some of the major fallout that would have happened if the majority had debt on variable rates.


Financial market developments: 

Current market pricing suggests that policy rates in the US, UK and euro area are at or near their peaks, and central banks have emphasised that they expect rates will need to remain at these levels for an extended period, in order to continue to address inflationary pressures. It’s fair to say they peaked a few months back – although US peaks have been more recent. 


Returning inflation to target sustainably supports the FPC’s objective of protecting and enhancing UK financial stability. Well, that is the entire point of the Bank! Not their SOLE purpose, but the one true goal. 


Long-term interest rates are high and remain volatile in major advanced economies. Despite falling back somewhat since Q3, US long-dated government bond yields have risen since the July Financial Stability Report (FSR), with UK, euro area and Japanese long-term government bond yields following a similar pattern. This has changed in the past 2.5 weeks with major revisions downwards in yields, and the markets now predicting 6 cuts or 1.5% off the US base rate by the end of 2024. We are still at 3 cuts in 2024 according to UK markets, or 0.75% off – and Capital Economics this week have predicted base down to 3% by the end of 2025. I’d be closer to 3.5% by then, but their forecasts normally deserve respect. 


Most of the recent upward move in US long-dated yields can be attributed to estimated term premia – the additional compensation that investors require to hold longer term rather than short-term bonds – which have increased from previously low levels. A number of factors could explain the rise in term premia across major advanced economies, including increased uncertainty around the longer-term economic outlook and interest rates, as well as evolving investor expectations of future supply and demand in government bond markets. This seems to be an effort to discuss that inflation is being priced in as stickier and higher than the Bank have predicted throughout this whole cycle. It really, nearly, is as simple as this. 


The full impact of higher interest rates will take time to come through. Given the impact of higher and more volatile rates, and uncertainties associated with inflation and growth, some risky asset valuations continue to appear stretched. You’d have to agree with this. Risk premia (the extra return for taking risk over and above the rate for government bond money) has been squashed compared to where it was in 2021, in the real easy-money days.


Credit spreads are broadly unchanged since Q3, with the exception of leveraged loan spreads which have widened a little. Some measures of equity risk premia remain compressed, particularly in the US. The forecasters in the US, however, are predicting a good year for equities next year on the back of rate cuts – and I’d be inclined to agree, if the first cuts play out as some suspect, in March or April. The election and how the Federal Reserve feels about Trump being President again (he’s the betting favourite now, in case you missed it) might lead to some tinkering that otherwise wouldn’t occur, though.


Global vulnerabilities:

The adjustment to higher interest rates continues to make it more challenging for households and businesses in advanced economies to service their debts. Riskier corporate borrowing in financial markets, such as private credit and leveraged lending, appears particularly vulnerable. This makes lots of sense. The big money is made and lost at highly leveraged margins, of course, and it tends to be in the “shadow lending” sector where these risks are most often taken. Think of those who lend to first-time developers at 30% per year or similar rates – a recipe for disaster at the best of times.


Although there are few signs of stress in these markets so far, a worsening macroeconomic outlook, for example, could cause sharp revaluations of credit risk. Higher defaults could also reduce investor risk appetite in financial markets and reduce access to financing, including for UK businesses. This is pretty salty chat, really, by the Bank – although it mirrors what I’ve been saying all along about fixing and removing those “upside risks”, for nearly 2 years now. It isn’t all rate-rate-rate – rates could be lower but credit could be harder to get, and where does that leave YOU?


Some banks in a number of jurisdictions have been impacted by higher interest rates. They also remain exposed to property markets, including commercial real estate where prices in some countries have fallen significantly. UK Commercial Property REIT is down 35% from its peak in March 2022, but most of that drop had happened before Liz Truss was elected in 2022, and this year has shown only a 7.5% adjustment downwards, which is not bad given the amount that rates have moved upwards. 


High public debt levels in major economies could have consequences for UK financial stability, especially if market perceptions for the path of public sector debt worsen. This is a fair comment. The debt keeps piling up and up – and is best measured as a percentage of GDP for this purpose. The UK has actually done OK compared to many of the other Western nations in this cycle, although it is still uncomfortably high,  but only 10% or so larger than a “high” level (compared to 25% over in the US, and more in some other jurisdictions). 


The FPC will take into account the potential for these to crystallise other financial vulnerabilities and amplify shocks when making its assessment of the overall risk environment. Vulnerabilities in the mainland China property market have continued to crystallise, and significant downside risks remain. Very true, and the demographics are not on their side – however, Evergrande has not had anything like the fallout that some predicted.


This could lead to broader stresses in other sectors of the mainland Chinese economy, and materially affect Hong Kong. An interesting point, although one could argue that some of this has been deliberate or at least an intended consequence of Chinese policy.


The results of the 2022/23 annual cyclical scenario indicated that major UK banks would be resilient to a severe global recession that included very significant falls in real estate prices in mainland China and Hong Kong. This has played out, largely, as predicted.


Geopolitical risks have increased following the events in the Middle East, increasing uncertainty around the economic outlook, particularly with respect to energy prices. If these risks crystallised, resulting in significant shocks to energy prices, for example, this could impact on the macroeconomic outlook in the UK and globally, as well as increasing financial market volatility. Of late, this isn’t looking overly likely. China won’t touch Taiwan with Trump in the wings, so nothing is happening there next year – and if the betting markets are right, for the next 5 years. There are other incursions bubbling – Guyana and Venezuela, if you haven’t heard – but Guyana produces about 200k barrels of oil per day at this time, and so the markets have not flinched.


Indeed, the markets have moved downwards in terms of oil price in spite of OPEC+ trying to squeeze supply to keep prices high. When these moves don’t work, it tends to be a sign to the downside – and with Brent at under $76 a barrel, this looks much less inflationary than a few days following October 7th and the most recent chapter of the Middle East scenario. This risk will ALWAYS be with us.


UK household and corporate debt vulnerabilities:

Since the July FSR, household income growth has been greater than expected. This has reduced the share of households with high cost of living adjusted debt servicing ratios, and a lower expected path for Bank Rate has reduced the extent to which that share is projected to rise. Interpret this as good news – the job market has not yet fallen apart which was the old Bank of England prediction. 


Nevertheless, household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments. This is a dripping tap rather than a sudden river, and back to the “debt wall” as already discussed.


Arrears for secured and unsecured credit remain low but are rising as the impact of higher repayments is felt by borrowers. A move from a safe place to a less safe place, but with lots of margin for error still in the system at this time. 


In aggregate, UK corporates’ ability to service their debts has improved due to strong earnings growth and the sector is expected to remain broadly resilient to higher interest rates and weak growth. Let’s call it like it is – those in debt here have been favoured by inflation in terms of fixed debt and the ability to pay it back. 


But the full impact of higher financing costs has not yet passed through to all corporate borrowers, and will be felt unevenly, with some smaller or highly leveraged UK firms likely to remain under pressure. The debt wall argument is just as valid here. Again, highly leveraged firms are always likely to be a risk.


Corporate insolvency rates have risen further but remain low. More of the same. 


UK banking sector resilience 

The UK banking system is well capitalised and has high levels of liquidity. It has the capacity to support households and businesses even if economic and financial conditions were to be substantially worse than expected. The job that has been done on the regulatory side since 2012 or so does deserve some credit. No-one gets praised for putting out the fire that didn’t start – but a different approach and we would have seen some real problems since early 2022. Affordability metrics, stress tests and the likes have been spot on.


The overall risk environment remains challenging, however, and asset performance deteriorated among some loan portfolios in Q3. Some forms of lending, such as to finance commercial real estate investments, buy-to-let, and highly leveraged lending to corporates – as well as lenders that are more concentrated in those assets – are more exposed to credit losses as borrowing costs rise. This is true by definition.


Aggregate net lending remains subdued, driven by reduced demand for credit and a tightening in banks’ risk appetites. People and organisations run by people want to borrow less as the price of that debt goes up. They also can afford less debt because of the mathematics of the affordability calculations.


The tightening in credit conditions over the past two years appears to have reflected the impact of changes to the macroeconomic outlook, rather than defensive actions by banks to protect their capital positions. Banks had their wings clipped after 2008, and have been relatively tightly regulated since – so this is perhaps not a surprise, and in fairness, could be more signs that regulation has worked better than it has in the US, where support has been needed for the sector since the wobbles when Silicon Valley Bank and Signature collapsed in early 2023.


There is some evidence that net interest margins (NIMs) have peaked. And I’ll tell you why – the easiest way for banks to make money is to be slow to put rates up for savers and fast to put them up for borrowers while the rates are moving. Now the rates haven’t moved much in the past 3 months (base not at all, bonds up then down and down a bit), those opportunities are gone, and competition kicks in (as do Martin Lewis and the rest of the financial press!)


The aggregate profitability of the major UK banks is nevertheless expected to remain robust, with NIMs expected to remain higher than in recent years when Bank Rate had been close to the effective lower bound, and similar to levels seen before the global financial crisis when Bank Rate was comparable to its current level. This makes sense because there are opportunities for margin on both the saver side AND the borrower side, which is “nice” for the banks! 3% margin on loan debt is not as good as 2%+ margin from savers and 2% margin from borrowers (with operational costs to consider) – 2 + 2 >3!


Alongside the higher risk-free interest rate environment, a number of systemwide factors are likely to affect funding and liquidity conditions in the UK banking sector over the coming years, including as central banks normalise their balance sheets. Code for blowing off all the profits made by the Bank of England, and something I massively disagree with as I’ve discussed before!


Those factors will affect sources of bank funding and could affect their cost – for example through continued competition for deposits and greater use of some forms of wholesale funding. Banks will need to factor these system-wide trends into their liquidity management and planning over the coming years. I’d hope that they would be!


The impact on individual banks will depend, amongst other things, on their funding structure and business model. Banks have a range of ways in which they can adjust to changing trends in funding and liquidity, including through their mix of funding and liquid assets, and through the nature, quantity, and pricing of lending they undertake. At a simple level, it is much easier to take deposits and put them into long-term higher yielding bonds than it was when those options didn’t exist!


The FPC will monitor the implications of these trends for financial stability. 


The UK countercyclical capital buffer rate decision:

The FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at its neutral setting of 2%. No change, but no reason to change that I can see.


The FPC will continue to monitor developments closely and stands ready to vary the UK CCyB rate, in either direction, in line with the evolution of economic and financial conditions, underlying vulnerabilities, and the overall risk environment. Let’s hope we don’t close the stable door after the horse has bolted. That’s what we usually do, after all!


The resilience of market-based finance:

Vulnerabilities in certain parts of market-based finance remain significant, and in some sectors have increased since the July FSR. Funds investing in riskier corporate credit have seen outflows. The fear will be that debts cannot be repaid, and a larger percentage of companies have not made enough EBIT to cover debt payments for knocking on 3 years now. These are the “zombies” that somehow are still trading.


Hedge fund net short positioning and asset managers’ leveraged net long positions in US Treasury futures have also increased further, which could contribute to market volatility if hedge funds needed to unwind their positions rapidly. So, hedge funds are betting on bonds going down and yields going up in the short term, and asset managers are betting on yields being too high/good value in the longer term – I spoke on this some months ago, when the most recent Rodcast Investment Mastermind came around – and suggested that the 30-year UK Gilt at 5.15% was one of the best duration bets I’d seen for a very long time – that Gilt is now trading at 4.5% or so – 0.65% per year for 30 years is some compound return, I don’t mind telling you……but introduce leverage into any asset and volatility goes up. This is what caused the fire after the KamiKwazi budget of 2022.


While the financial system has so far been broadly resilient to the higher interest rate environment, vulnerabilities in market-based finance could crystallise in the context of higher and more volatile interest rates or sharp movements in asset prices, leading to dysfunction in core markets and amplifying any tightening in credit conditions. Volatility is the risk, and volatility has nearly disappeared in quite a freaky way. It does remain a concern, there are no two ways about it. We’ve seen significant volatility though, and got through it – and you would think we’ve seen the worst of this cycle – with the standard caveat that Black Swans can always swim along!


Alongside international policy work led by the Financial Stability Board, the UK authorities are also working to reduce vulnerabilities domestically where this is effective and practical. The FPC welcomes proposals by UK authorities to increase the resilience of UK-based money market funds, which have been published today. I have not yet looked into these – I suspect there needs to be meat on the bones here before we know what it actually might mean. Still, being proactive is a sign of a good regulator, so this meets with approval from my end.


In November, the Bank released the hypothetical scenario for its system-wide exploratory scenario (SWES) exercise. The SWES will assess the behaviours of banks and non-bank financial institutions during stressed financial market conditions, and how they might interact to amplify shocks to markets core to UK financial stability. Under the stress scenario, participating firms will model the impact of a shock that is faster, wider ranging and more persistent than those observed in recent events in financial markets. This is what’s needed – we nearly got to the stress level on the last major stress test (Base 6% was one of the ingredients) and it shows just how important those systemic exercises are.


I know that analysis of that report is technical, complex, long and a bit dry – but the major takeaways should be:

  1. i) Inflation is still a risk, but less of a risk than it was 6 and 12 months ago
  2. ii) Rates look like they have peaked – the first time the Bank have admitted this

iii) Insolvency and credit defaults are on their way upwards, but have started from a very low level – so at this time, there’s no cause for concern – it’s just what happens when prices (in this case the price of debt) go up particularly quickly

  1. iv) Best guesses are for base at 4.5% by the end of 2024 and 3-3.5% by the end of 2025, that’s the market, not the Bank’s opinion – they are holding the party line that “stronger for longer” is the only message
  2. v) Credit risk and appetite could tighten, even if rates have peaked – and this is one of the main dangers for Property Investors to consider
  3. vi) Wages are catching up with inflation at this point and moves from this point should be positive for workers


Thanks for sticking with the report analysis!


I started this week with a great podcast interview with Jerry Alexander’s Commercial Property Podcast – well worth checking out if you haven’t before. Anyway – amongst the many great and stretching questions Jerry asked me, one was around the suitability of the interest rate tool for tackling this particular inflationary bout. I have referred to this in fits and starts over the past few years – but I believe I need to give a more full and firm answer than I did to Jerry’s question. 


So – the argument goes, if inflation is transitory and brought about by the increase in cost of durable goods and supply chain constriction in general, feeding through to lower supplies of commodities – why raise the interest rate, since this is all exogenous (from outside of our own ecosystems) and therefore raising the interest rate will not have the desired effect. I get it, but this is ultimately wrong, and I will explain why. I saw this question asked at a Bank of England briefing and the regional rep, frankly, fluffed the answer. I told him what I thought the answer was, afterwards, and he told me my answer was far better than his (I think he was just being nice, though) – but here’s how I framed it then:


Regardless of the cause of the initial inflationary shock, there are only two broad approaches, and only one for the Bank of England – and that is to put rates upwards. The mistake is thinking that they are trying to address the root cause of inflation – of course they are not. That would not be their job anyway – if it was addressable, it would likely have to be addresses via the only other approach – fiscal policy (spending and taxation, controlled by the Treasury/the Government). They were stuck pulling the only lever they really could, to slow down the economy and (and here is the part you wouldn’t hear on the TV…..) destroy demand, via discouraging consumption and ensuring there are fewer pounds in pocket to spend from consumers, addressing the only part of the inflationary puzzle that they can.


They were never trying to fix a problem that they couldn’t fix. This is just a case of looking at the problem in the wrong way. It is an operational level point where a strategic level is needed to fully understand and attempt to fix it.


It is also, at this time, appearing to work. This is the interesting part, really, because historically in these sorts of situations it always looks like it is going to work until it doesn’t. However, at this point, it isn’t self-evident what isn’t actually working – and with rates going downwards on mortgages thanks to swaps moving downwards, that big problem gets less and less likely. I do maintain that a fast transition downwards is still unlikely – and more and more sludge and treacle is likely before we get to an election announcement which will lead to near-paralysis – although the direction of travel, and the resultant overall feeling of the consumer and nation will be more positive, especially if we get to April’s pay rises with inflation looking under control (under 4%). I’m not convinced on that front, just yet – but it isn’t out of the realms of all probability either.


I hope that clarifies my position on that argument which has been well expounded over recent years, and I hope it makes sense as well!


Well done for getting to the end, as always – if you haven’t heard, I made my 500 subscriber target and my Propenomix Advent Calendar is online (with a release each day, one 60-second explainer and one longer-form but under 10 minutes). Subscribers are very, very welcome, and here are the links – for the channel: and here to the Propenomix website: – thanks for supporting me spreading the word, more subscribers will lead to more and better content. Only those most important words of advice remain – Keep Calm and Carry On!