Supplement 25 Feb 24 – Bankenders

Feb 24, 2024

[INFLATION] “It is always and everywhere, a monetary phenomenon. It’s always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output.” – Milton Friedman, possibly the GOAT in Economics – certainly when it comes to inflation. 


Before we begin – Rod Turner and I are running a FREE online Partners in Property PIP Taster Event on Monday 26th February at 7pm and this is the LAST CALL. We are talking about the Property Puzzle in 2024 – taking on a whole number of topics including stacking deals in the current environment, rents, house prices, financing arrangements, and the likely impact of the upcoming general election – amongst a number of other topics! It is 90 minutes long and free to air, won’t be recorded, and won’t be repeated – sign up, gratis, at 


Off to the races we go. After the smorgasbord of the past couple of weeks, there’s a healthy side salad of macro for this week, and then we can get stuck into the Bank of England committee notes from their appearance in the House of Commons this week. I attended their breakfast briefing this week, and – as usual – had some annoying questions from my chosen position on the front row……yep, I’m that guy (you knew that anyway) – so I’ll find a way to weave those in at the end. 


I’ve had to hark back to something that is still surprising me. Even in a room like the Bank of England regional briefing – with a whole variety of the great and the good in the wider Warwickshire area (and also me) – it is evident from much of the audience participation that they just still don’t understand inflation. In fact, too many of the attendees don’t really understand the Bank’s remit, and ask for opinions on politics, stock markets, etc. – luckily the regional representative shuts them down very quickly. However – even with clear and detailed slides on the screen, explaining inflation – the impact overall (20-25%, with variability of course, since the pandemic started) is simply forgotten. 

Are we so entrenched in nominal thinking? Is it the fault of the cheap money era, with everyone forgetting what inflation really could do? Something else?

Not sure – but that’s my cathartic rant out of the way – or at least introduced, anyway. Before I get right back into the detailed quarterly Bank report, I am going to get into the macro of note this week, as always.


Four choices – four topics. That sums up my subject matter for the Supplement on the macro front these days. This week – The bond yields (spoiler up front this time round), the flash PMI numbers (which I love to follow for their predictive powers), consumer confidence, and concluding with the buffett of Bank of England MPC members and their pronouncements at the House of Commons Treasury Committee. 


Kicking off with the yields then. A 5-year gilt sale this week sold well over our magic threshold, into our expansion territory – 4.1% at first issue. That was a snippet of value there since we opened the week at 4.015% and closed it at 3.932% after a late buzzer-beating smash well below the magic number in Friday’s trading. It really was quite low-volatility and devoid of incident – some activity after the flash PMIs, which I will get into, but it simply got blown off again.


The swaps have still been trading a tiny bit under the gilt yield – showing a market that still is relatively devoid of mass new loan appetite – for simple mathematical reasons. Until rents are up considerably more, for retail investors they stack the average deal and walk away because either “it doesn’t work” or “it doesn’t look like it used to be”.


Onto the flash PMIs. Remember the formula – Services plus Manufacturing equals composite – but not in equal proportions. Services are about 6 times the size of Manufacturing, in the UK, these days (from a GDP perspective). The Services PMI held up at a buoyant 54.3 – 53 is a very healthy score from a long run average perspective in a decent economy, so 54.3 is comfortably on the right side. That held the composite score up at 53.3 versus a consensus of 52.9, so the economy is still ahead of what was expected (and this was the one bit of macro news this week that pushed the yields beyond 4% for a sustained period after the news was released, but they did just come back comfortably under 4% for the week’s close). Manufacturing was up from the previous month but under the consensus forecast, but due to its much smaller share of the index, it didn’t make much of a dent – the number was 47.1, so the sector continues to shrink for the moment from a PMI perspective.


The consumer confidence stats next. Last month was a surprisingly improved outlook given the continuing challenges that consumers are facing with getting used to a “new world” of pricing. Thoughts were for roughly the same print as last month, and that’s pretty much what we got – a couple of points lower at -21 (0 would be neutral, remember) compared to a forecast of -18. Most of ‘22 was spent between -30 and -50, most of ‘23 was -20 to -40, so we are still printing more healthily than that. 


If you wanted to draw a conclusion from last week’s Supplement regarding recessions, you might say that I highlighted the toughest time as Q3 21 – Q3 22 for households (Q3 before we reached the net low, but Q3 23 before we got back on an even keel – so we “lost” a couple of years of economic progress in the wake of the pandemic, which – all else being equal – is actually an incredible result) – compared to GDP per capita recessions or just GDP technical recessions. My focus in that analysis is on the people and not the entire economy – and might well explain why the consumer confidence stats pretty much track that analysis. 


We are starting to print numbers on the confidence index that look more like when we went into my definition of the tough times – Q3 2021 – but seem at the other end of the curve. If we took a parallel between the UK and the US, their technical recession in 2022 that was erased (probably correctly) from the history books by their senior economists has certainly not held back GDP growth at this time, although their real household disposable income equivalent had a massive boost with the stimulus cheques and pandemic response in 2020 and early 2021, but they went on the same journey with their household disposable income in that there was no growth between February 2020 and June 2022 – although the growth since June 2022 is 6.2% for the average household (in real terms). With wage rises expected, suggested and enshrined this year, the UK could look relatively similar within 3-6 months as April ‘24 is D-month for wage increases (and benefits increases).


So we might be more confident about confidence but – and no wonder people cite mental health pressures more and more – the consumer confidence index has not been above zero since January 2016. Pretty tragic from a fragility perspective. 


So onto the Bank of England speeches this week, before getting onto the Bank MPC report. The “important” one is, of course, deemed to be the Governor. There’s been a very sensible spate of speeches recently by the Governor, and I am reconciling the fact that I agree with a lot of it with the fact that someone else writes his speeches, and he is just the mouthpiece. It is also a lot easier to predict what’s going to go on from where we are today compared to the volatility of the past several years, and so you’d expect our opinions to converge somewhat. 

His rhetoric at the moment is effectively: The market forward curve (Assumptions on future rates) looks “about right”. This is consistent with his narrative that the Bank has done the right thing, which of course he would say, but also the Bank has been proven to be correct that the market spent a lot of time overestimating the terminal interest rate for this cycle in the past few years. However – here’s the opportunity for my “big short” moment.

The world just isn’t ready for the UK economy – or any of the bigger boys – to need to put rates UP from here, at this time. The probability is small, but there are a lot of little things going on that are not congruent – especially in the UK – with inflation coming back to target. Wages is the biggie – the trend is downwards, and will be, but not downwards very fast at all. Here’s the most basic summary I can give which would still be remotely useful in the context of this conversation:


Wages up 5-6% this year, probably. Benefits up 6.7%. Pensions up 8.5%. Food prices have come downwards, but are getting back to a place where they will probably go up slowly again. Energy hasn’t reached its low yet, that will be July this year, all else being equal. The risks remain to the upside and another geopolitical upset – including a healthy 20-25% chance of escalation in the middle east, some of the analysts say (I’m not going to even attempt to give my own view on that probability, I have nowhere near enough info and haven’t done the work – lazy I know) – would mean all bets are off and we are coming from a fragile situation in the first place. The size of the problem would be directly proportional to the size of the escalation in any geopolitical conflict. Oh, and services inflation is still roaring well above 6% and the downward trend – frankly – just isn’t there. Sideways, yes – downwards, no.


That’s not the recipe for 2% inflation. Arguably, it is, according to the Bank, over a 3 year period. OK. If you just calmly draw lines downwards on a graph, I agree – but let’s face it, real world Economics doesn’t happen like that. 


Ergo, what’s the chance, or what’s the certainty, that we’ve reached our very top base rate here? A lot of those reading or listening might be thinking right now “oh, I thought that was pretty much guaranteed”. Listen – it is the overwhelming favourite. I’m not trying to scare anyone – just explore what might happen in this sort of scenario. 20-25% feels like a high probability to assign to more rate rises – the same probability of Middle East escalation – and I think more likely 10-15% because some of that escalation might not be enough to knock the train off its tracks. What happens if the “chainsaw guy” (check for the videos if you haven’t seen him) – the still-new Argentine president – decides the Falklands are coming home. Etc. 


10-15% is still uncomfortably high (between 11/2 and 9/1 who prefer “old English” betting odds). The reaction could be really considerable, because it would really bring uncertainty back onto the table. Specialists in high volatility/low-probability, significant outcome trades (like Brownfield Capital in the great movie, “The Big Short”) and I suspect you’d find a few hedge funds betting on this outcome at the moment if they can be getting odds like 20/1 or similar against these outcomes. Likely to lose, but massive payoffs if they win – extracting expected value.


So – we have to press on with a mentality around those risks. To listen to the Governor (back to him), those risks are not really being flagged any more. That’s uncomfortable. The remaining conclusions from him are that the labour market is strong (it is, but our measurement stick – or the ONS’s – is up the spout, which is worrying) – and ultimately, unemployment is low because sickness is high. There’s an alternative view for you – and that’s the issue with just watching unemployment. Employment is 1.2% below the pandemic – which feels about right, and the bill that imposes on the state is significant (part of our fiscal drag following the pandemic). 


A quick word about the others. The others to speak this week were Dr Ben Broadbent – Deputy Governor for monetary policy, so Bailey’s understudy when it comes to the interest rate – and also Dr Dhingra (the one remaining dove on the committee), and Megan Greene (who I analysed last week – closest to my current views on rate decisions). They get called to the House of Commons to give oral evidence on the most recent monetary policy report.


Rather than even attempt to analyse this line-by-line, I will draw out the punchiest parts of this evidence.


It opened with the Chair – Conservative MP – basically asking (for understandable reasons – looking for looser economic policy to help election chances, let’s be honest) “What will it take to get rates down, then?”


There was a reminder that the economy is “basically” at full employment – from Bailey – which, as above, it isn’t when you look at actual employment figures. We might be using “all the well people we’ve got at this time who are looking for jobs” or something convoluted – but really it just means a tight labour market with a lot of sick people who need benefits.


Broadbent proceeded to throw the ONS’s recent data quality issues around the labour force survey and unemployment under the bus – not entirely unfair, but doesn’t help anyone. Next question to Bailey was “Why is the forecasting so rubbish” and he dodged it, citing the Ben Bernanke review which is “being written very hard” (yes, really), and will be with us “mid-spring”. Time before the next committee to think of some excuses then. They pushed him into saying the report would be with them in April. 


Greene then said she needs more evidence to change her already-changed vote (from rise to hold) to cut. Citing wage rise concerns (rightly so). I am struggling to see, personally, how the maths plays out when the falling prices (just taking their time to come down from their temporary peaks) hit their bottoms, already have or will do in a couple of months (food), or will do in summer this year. 

Dhingra is different. She wants to focus on the trends being downwards in consumption activity. It is such a big part of the economy – I can see her point of view. 60% (ish) of nominal GDP, 62.5%+ sometimes depending on who is doing the measuring. That’s significant – if you are trying to curate GDP. That’s obviously not the stated objective of the Bank of England – it is a bit like not expecting the CEO, execs and the non-execs NOT to manage the share price, especially if the share price is part of their remuneration packages (it isn’t at the Bank, of course!).


She doesn’t want to loosen too late. The others don’t want to loosen too soon. Rather than drive a truck through any individual’s opinions and statements (which is relatively pointless, and somewhat unfair, especially given their level of qualifications in the field) we might simply be able to suggest that as long as the mix on the committee is “right” between hawks, doves and realists, then we are OK. 


Migration and growth were other questions – of course – but really outside of the Bank’s remit. The committee’s opinion on those matters is exactly that – opinion. Discussing how good – or not – GDP and figures are is interesting, but ultimately useless – there are no active proposals to change these measurements. 


Bailey reiterated that the Bank’s forecasts are based on the market’s forward curve predictions on interest rates – where they settle just before the meeting. This is necessary otherwise their forecasts become circular. However, rather than cross-sectioning they should blend or average somehow from the weeks leading up to the meeting. I suspect this might make Mr Bernanke’s report, so if it does, you heard it here first in the Supplement.


The Bank actually doesn’t mention this enough – when getting roasted for forecasts of gigantic recessions, this was against a backdrop of a market expecting a 6.5% base rate. IF base rate had gone there, I think it is safe to say things would have been pretty ugly. Instead the Bank was right in that scenario, and didn’t shout about it enough – the market had gone way over the top just because Liz was, indeed, a bit of a lettuce.


Stephen Hammond spent a lot of time talking about how the Fed were better providers of forward guidance than the BoE – hogwash, really, because Powell and Bailey are both poor communicators and poor follow-ups to other great central bankers of the past for both banks. Broadbent disagreed with the forward guidance calls. He reminded the committee of the “data, not dates” colour around future rate cuts.


In summary – there will be some, at some point, of some depth. That’s all anyone is getting right now, because if and when things change, the committee will change their mind. The strength really is that no-one is asking that question at the moment “could rates go up” and so the MPC don’t have to answer it, because everyone has assumed that they aren’t going up any more. Yep, I’ve mentioned it twice because I am uncomfortable about any assumptions around no more hikes, this cycle. 


Hammond pressed on asking for dot plots, or opinions on dot plots. The dot plot is derided in the US by the decent analysts, so it would be difficult to support (for those who don’t know or haven’t heard the term, it is literally some dots from each member of the Fed committee in terms of where they think rates will be over the next several periods, including a couple of years and beyond. Educated guesswork or what…..). Hammond is trying to force forward guidance, basically. Greene wasn’t against them, but says they are interpreted incorrectly (agreed). Dhingra also wasn’t against them, but suggested that it might help draw focus to the medium term rather than the immediate term, which might be a good point – although it shouldn’t take a dot plot to do that. 


Coffey then raised some pretty ridiculous points when Bailey pointed out that a war in Ukraine changed things quite significantly (Coffey didn’t know enough to point out just how much had changed plenty before the Ukraine war – energy prices had been on the up for 12 months for example – Ukraine was a reasonable size shock to an economy that was already fragile). Bailey got the better of that exchange. That’s Coffey’s economic nous distilled very quickly.


Bailey swerved her question on whether raising minimum wage so much was a good idea or not, or had an impact on the wage growth concerns (of course it does, for goodness sakes). He said that pay negotiations should come down as inflation expectations come down. However, again, no-one knows enough about the data to challenge this. Inflation expectations were 3.5% for 2024 and are now up to 3.9%. Overall wage expectations by firms are +5.3% or so for 2024. So, firms have to find other savings (and remember, energy is coming down for firms too) – it does depend on how accurate they are on wage predictions and also how staff-heavy various companies are, of course. Perhaps that CAN add up, all else being equal (which is handy, and also unlikely).


Coffey continued to embarrass herself by not knowing how the committee had generally voted. Going down the line that there hasn’t been a healthy level of disagreement is just wrong – and she was told as much. Waste of time. 


Baron then asked some much tougher and better questions, around whether policy was over-tight. He was set straight that the current thought is that when the steam comes out of energy and food once and for all, that isn’t dragging CPI down any more. The CPI picture is so poorly understood (as I always go banging on about services inflation, for example, making up 47% of CPI). 


Greene supplemented this discussion very skilfully though with reference to true economic history. Can you tell I’m becoming a Megan Greene superfan? Her point was – loosen too soon and you get a US of the 1980s, where you need to tighten further and that hurts growth more, for longer. This all tracks back to why she was right, and the hawks were right, back in September 2023’s meeting, and we should have gone to 5.5% as I’ve said all along. All that’s cost us is an extra 3-6 months at higher rates, overtight, than we would have had otherwise. Remember that vote was 5-4 in favour of holding at 5.25%, making Coffey’s question on consensus look all the weaker.


Baron then focused on QT – quantitative tightening – and bravo, this rounded an excellent bit of questioning from him. I have made it no secret that I disapprove. He nailed it by confirming it is a leap in the dark. He didn’t quite get into the detail I would have liked (I’d have to be carried out of one of these meetings by security detail, of course, because I’d be like an express train) – and got told that the committee believe they are doing the right thing, basically. Which of course they do, otherwise they wouldn’t do it. I think they are wrong on this one though.


Baron’s final question was about groupthink, in the context of Brexit. He nailed it, but the committee 8 years on has different people on it – and Bailey, to his credit, has never taken a position on Brexit. The only place where he is superior to the previous Governor – simply because it isn’t within his remit. He is more limited than Carney – but that leads him to stay in his lane, too.


Bailey confirmed also that the MPC doesn’t anticipate any fiscal policy – it only reacts to it. Probably the right thing to do, on balance. Passive-aggressively, it seems to say to me that “just remember when we had to sweep up after Liz, for example. We don’t trust you folks at the moment” – and who could blame the Bank for that? Bailey’s answer actually made a real mockery of the Government, to be honest, who will be paying with lettuce banter for many a long year. Before reading these minutes I’d never seen Bailey get the better of even a reporter before, but he made mincemeat of a couple of these MPs. That simply leads me to be even sadder at the state of the standard of some of parliament, right now – some of these have or do hold ministerial roles, as well. Sigh.


Mather accused them of seeking a recession. “Raise till they break” – what was said in the US, of course. That is, after all, technically what has happened. Raise and the recession has come. Bailey held hard with the stance that the Bank has done its job – targeted inflation.


Coffey resurrected herself by pointing out (presumably after actually looking something up) that Broadbent has never voted differently to Bailey. Finally she scored a point. She messed it up by mixing it in with a point that was supposed to evidence that the Bank DO forecast fiscal policy, but actually was corrected that the Bank was simply following what the stated fiscal policy was, not anticipating it. Another own goal, and she slipped back to 4-1 behind with 5 mins to go.


The ONS and the labour force survey went under the bus one more time, and we learned that the ONS are not releasing the new Labour Force Survey until September – this is not ideal, really not ideal, because we could do with a more accurate picture of what’s really going on in the labour market. It is down to vacancies and observation at the moment, I’m afraid – rather than the headline data (although, as I’ve argued many times, we look at the wrong bit anyway). 


The most definitive statement on the back of all this was from Megan Greene, who says she is “reasonably sure” the labour market is going in the right direction. That doesn’t sound that sure, does it, really – and that’s appropriate at this time, I’m afraid. She got away with it. Presumably there are fewer points to be scored by slicing a piece off Ms Greene anyway.


Dhingra offered an excellent alternative viewpoint. She pointed out that it was lower-income sections and areas seeing a rise in inactivity. This potentially incendiary point was glossed over (perhaps lost on at least 50% of the committee). Let me do what no-one had the presence of mind, or the guts to do, from that statement:


  1. i) People in lower social demographics are more likely to go on the sick when there’s an opportunity (that’s about as far right as I could make that statement)
  2. ii) In lower income areas, the businesses also tend to be less profitable and thus when there are large increases in costs, they cut recruitment faster

iii) Forcing minimum wage upwards aggressively in areas of lower income leads to more unemployment (or, alternatively, inactivity) in those areas

  1. iv) Productivity suffers when minimum wages move upwards aggressively, particularly if paired with workforces that are disengaged, quiet quitters, dead end jobs, and/or suffering with longer-term mental health issues thanks to Covid.


I could go on (and on). These aren’t exhaustive, or exclusive. However, I really like Dhingra’s line of thought here, going on about the productivity side rather than sticking at the base level of what we can see in statistics that sometimes are simply not that accurate. She uses the words “really serious productivity issue” and no-one has the presence of mind to press further, and instead take the discussion in a totally different direction. Head in hands.


The next point was about bots in markets, which I can be fairly confident that neither the questioner, nor the questionee, know much if anything about. Centering on energy pricing, Bailey pointed out that this is simply flagged as a risk (Middle East/Red Sea) rather than forecasted, which is a point already made, and the only sensible way to deal with it. These risks are deemed to be priced in, even if markets have a history of being poor at pricing in extreme events, historically. 


Broadbent then responded with skill to a Kruger question about oil prices going upwards in the event of escalating conflict, and talked about the larger second-order effects – i.e. what oil going upwards really means other than the price of oil itself being more expensive. He also rounded off that the point is the deflation in goods coming out of China (perhaps due to the strategic move away from China for many governmental purchases in various western economy, so prices have had to come down even more – plus ever-cheaper nations applying pressure whilst trying to pick up the business that some of the West wants to move away from China) is a good foil for the increase in container prices at this time.


Dame Eagle then got stuck in with some good questions. We moved on to GDP per capita – sadly, no-one came in with RHDI as I would have hoped (I suppose these are only the theoretical top people in the country – sigh number three). It wasn’t without merit though – Broadbent mentioned a large housebuilder that he had been to see in the autumn who had had a 30% drop in activity but laid no-one off, because they believed it was temporary and cyclical. This type of “labour hoarding” is not uncommon, especially in the UK, because workers are protected and also in a tight labour market, the cost of recruitment can be huge. You can imagine, though, that it affects recruitment going forwards because it is a long time, as and when things get better (as they arguably already are), that that business gets back to capacity/full steam. 


Eagle then tucked into the banks. 5%+ in interest rate rises yet only 2.1% or so passed on to savers in the bigger banks. True, but instant access probably isn’t a fair comparator – there have been plenty of 5-6% savings bonds out there in the past 12 months after all. Bailey pointed out that he had answered this in his Loughborough speech last week which I referred to in a smaller way. He was discussing competition and his point of view that Bank’s shares look cheap (he said this in a roundabout way). Once again I agree with him, and therefore I’m off to lie down in a dark room. 


Greene confirmed that pass-through in the UK has actually been better than in the US and some other jurisdictions too. She will be gaining some fans in the banking world!


Bailey then confirmed the Bank sees that the rises have done 70% of the work they would expect them to have done, up from 50% in November. They actually also put some colour around the effect of QT – which I had personally estimated before – at 10-15 bps (exactly where I had it – that’s pleasing). So – effectively – the “real” interest rate at this time is more like 5.4% than 5.25%. 


The Chair finished in a meaningful although oversimplified way – “A” is the risk of overtightening – staying at higher rates for too long, and “B” is the risk of the labour market and wages staying too tight and increasing too much too quickly. Which is the bigger risk, she asked?


Dhingra basically said A – of course. Greene said B, just about, but said A and B were close. Bailey and Broadbent – once again groupthinking, as called – said A and B were balanced in their views. My own view is that Bailey contracts his thinking out to Broadbent – not groupthink, just intellectual theft – I can almost see that when he took the gig, he said “listen Ben, you are next up in line, I just need you to tell me what to do for 8 years”. Seems reasonable.


Unfortunately, though, Broadbent is approaching the end of his second term, and may well be off. So whose views will Bailey adopt next!


I hope you enjoyed this week’s episode of “Economic Eastenders”. No-one was shot, died, or slept with anyone’s sister, so I appreciate this wasn’t prime time viewing, but still, these insights are absolutely key if you want to even attempt to understand what’s driving interest rate policy, and by extension, the bond markets, and by further extension, the property market.

The market feels quite tight, static, and stuck around the 4% 5-year bond mark. Margins are thin, but can be thin when volatility is down – which it is. We need to avoid any real, major (not press-generated) crises before the next Bank meeting – Thursday 21st March – less than 4 weeks away. Quite likely. That’s the day after the Feb inflation is announced, and the week after Feb GDP is announced. Wages and unemployment will also be out for Feb by then. Let’s see where the chips fall on that meeting but it is definitely timely.

Remember we need that meeting first of all where all vote down or hold, before expecting a cut. Short of an emergency situation, the first cut simply can’t be until May, and it is much more likely, in my book, that May is the first “no-up-vote” meeting, rather than March. (That still wouldn’t guarantee a cut in June by any means, but it would at least be a live vote). 


If Mann had been at the Treasury Committee I could be more sure, because she seems the hawkiest hawk. Broadbent’s replacement is either a Hunt adviser (Lombardelli) with a long history of public sector work, or Vlieghe who has already done 6 years on the MPC as an external. From his 6-year voting record, he looks to be a light dove, although his 6 years (15-21) were not full of interest rate changes (there were a few, mostly down, thanks to the referendum and the pandemic). 


If this was a football team – Broadbent has 125 caps and it is no wonder Bailey has shadowed him. Beckham is retiring here – and only 3 in history had more caps. Vlieghe has 54 caps already and would come in as equal-top meeting attendee, in a committee that otherwise looks a bit light on miles on the MPC clock (although experience on the BoE isn’t the only fruit of course). Lombardelli looks more like a Treasury mole going in to “make a difference” before the election – of course it is easy to go down a conspiracy theory route, but that might be incredible timing. So – who appoints the new Deputy Governor – oh, let’s just check the job advert on the Government website:


“Candidates are sought for the role of Deputy Governor, Monetary Policy. This appointment is made by His Majesty the King, on the recommendation of the Prime Minister and the Chancellor of the Exchequer. The appointment is expected to commence in June 2024.”


A fiver on Lombardelli it is, then.


I’ll draw what’s already too long – #sorrynotsorry as always – to a conclusion with my findings from the Bank Breakfast Briefing this week. The “front row guy” – me – asked two questions after a presentation which basically said – yep, we are cutting at some point, soonish but not straight away – and more importantly – we agree with the forward curve (first consensus/open statement of this for 2 years or more). 


Question 1: How concerned are we or should we be about services inflation – answer – quite concerned, but it is going in the right direction, so calm down (I didn’t rebut with – hang on, it is UP for the past 2 months – I can’t completely hijack the Q and A – but suffice to say I wasn’t happy with the answer)


Question 2: The rep mentioned that the MPC is expecting savings to go up. I was surprised at this (although I hadn’t given it much, if any, thought, before the rep reported it). The thinking here is threefold – i) uncertainty in the job market in general ii) more attractive savings rates than in previous years (can’t argue, but they are trending down, slowly, as a rule) and iii) uncertainty around geopolitical situations/baked in fear. A much more robust answer which at least addressed the question, and hard to disagree with this – my follow-up here would have been “OK, so – how much and therefore how recessionary is this trend likely to be” which is a question I’ll need to try and answer myself, in a future week. The data on savings is WOEFULLY slow to come out, though, so I will need to find a better real-time proxy to produce anything meaningful about this.


When you look back – for comparison – the savings ratio was between about 4 and about 6 per cent after the referendum, spiked hugely during Covid, and then settled between 6.6% and 10.1% (our most recent figure, which is Q3 2023). So – I’d argue this is more pandemic PTSD and we have been scared back into saving like we used to, rather than fairly safely consuming as we were between 2016 and 2019. 


What’s a few per cent between friends – the magnitude here is a difference of 5%, and growing – so I am now told – 5% being saved rather than consumed. Consumption is, remember, 60%+ of the component of GDP – so 5% of that is 3% of GDP – £75bn per year. £75 BILLION. That’s not subject to VAT. Not in the circular flow of income. Not causing inflation. I could go on with a lot of things that £75bn is not doing. It would – though – of course – be earning about 3% a year (if we took an average of the big bank rate and the “best buy” savings rates – £2.25 billion – taxed at an average of 25% shall we say (guesswork, but much will be retired people under the 40% threshold, the rest will reside in those who do pay at 40% and above?) – £562 million that wouldn’t be there otherwise. 

If instead it was consumed, however – let’s again estimate that 90% would be on VAT registered goods (because not much escapes, let’s face it – the stuff that does is supposed to be essential, after all) – that’s £13.5bn in VAT that isn’t taken in by HM government. Just at first pass. Before we work out all the other taxes that that money percolates down into – income, national insurance for the extra workers needed to supply those goods and services – etc. etc. 

Damaging things, savings, when you look at it like that. One thing that came out of the meeting that reminded me – I’m only 80-85% sure we are out of recession this quarter. The PMIs keep me to the top of that range, or even 90% after taking those into account. There’s still a month and a bit to go, after all.


It can’t help you feel, though, that one real answer in solving some of the issues faced in the modern post-industrial capitalist democracy would be unlocking the wealth that isn’t productive and doing something with it. I prefer a people-led solution to that rather than a red flag, Jeremy Corbyn/John McDonnell style solution – of course. I proposed one a couple of weeks back (enabling Bank of Mum and Dad with HM Government shaving a few much-needed quid off the top). There are more. In fact, Hunt has been closer to unlocking them than anyone else for a long time – and at least is thinking down these lines. Sadly, out of self-interest and just bad timing, he now has an election to try and win with his (possibly) last real bullet in the chamber. 

That’s with us on 6th March – the week after next – and you can guarantee there will be one place to read and listen about it in the appropriate level of detail – the Supplement of course! 


Congratulations as always for getting to the end – don’t forget the FREE Taster Evening on February 26th, you can register here: and Rod and I will delight you (ok, what do they say, don’t overpromise and underdeliver) – or at least briefly entertain you – with our respective takes on the current market and the challenges coming in 2024 – alongside, of course, some more detail on the opportunities. Until that event – and until next week’s article – Keep Calm and Carry On, of course!