Introduction
The Bank of England (‘the Bank’) has given Labour seven free gifts during its first five months in office.
This is not surprising as the Bank pursued Labour monetary policies throughout the Conservatives’ fourteen years of nominal rule.[1]
But the eighth proposed freebie has blown up in their face – thanks to Labour’s mismanagement of the economy.
The Bank steering the economy leftwards during the Tory years
The size of the Bank’s interventions during the Tory years and their tenuous connection to its core mandate of controlling inflation enabled the Bank to exercise unrestrained power.
None of Cameron, Osborne, May, Hammond, Johnson, Sunak (as Chancellor), Sunak (as PM) or Hunt tried to roll back this overreach. With the Bank’s avatar-starmar in place as Prime Minister and its own alumna Reeves as Chancellor, the Bank can ditch any pretence of impartiality.
Alt-reality takes its place again at the centre of national economic decision-making
David Ramsden (Deputy Governor, Markets and Banking), in a speech in Leeds on 20th November, could only talk about interest rates coming down, even though they have been going up along with inflation, government borrowing, government spending, unemployment, and taxes. It was as if the pesky real world does not exist.[2]
The Bank has taken seven actions since the general election that have attempted to super-impose its alt-reality onto the national economy. These actions are directly supportive of Labour but are unjustified by external circumstances. One frustration has arisen in its attempt to construct The Matrix, as the pesky real world got in the way.
Actions 1-4: unjustified Bank Rate cuts, and what money they directly deliver to Labour
¼% cut in the Bank Rate in July to reward Labour for gaining office and because inflation was allegedly under control – just as Labour were splurging out above-inflation public sector pay rises.[3]
¼% cut in the Bank Rate in November even though the Bank was expecting inflation to go back up to 2½% and this year, and whilst services consumer price inflation was running at 4.9%, and private sector wages were growing by 4.8%.[4]
These changes in the Bank Rate allowed National Savings (i.e. the government) to reduce the rates paid on savers’ accounts, reducing the government’s debt costs.[5]
These changes in the Bank Rate cut the monthly loss passed back to the government by the Bank on its Asset Purchase Facility (the APF, aka the Quantitative Easing programme). The APF bonds were a terrible investment and produce around 1% per annum of income. The Bank funds the APF with commercial banks’ Minimum Reserves, and was paying 5¼% for this funding until July, 5% from July to November, and now 4¾%. The APF amount was £695 billion between July and October, and £659 billion since then. The Bank’s cutting its own loss by ¼% from 31st July until 6th November gave Labour £456 million extra to spend.[6] Since 6th November the Bank has been giving Labour £9 million more to spend every day.[7] [8]
Actions 5-6: tacit, but self-interested, acceptance of Labour’s fiddling with the measure of the national debt
Silence – meaning a welcome – for Labour’s plans to rewrite debt rules to exclude the Bank’s APF, getting the evidence of the Bank’s monetary policy misjudgements out of sight while allowing Labour more headroom for spending.[9]
Silence – meaning a welcome – for Labour’s inflationary plans to take Great British Energy and the National Wealth Fund ‘off-balance-sheet’, hiding both their own debts and debts (such as borrowings from BlackRock or pension megafunds) that are incurred within their ‘critical infrastructure’ schemes. Labour’s ‘Public Sector Net Liabilities’ allows the assets bought with this splurge of spending to be netted off against the debts – although the debts still exist and attract interest.[10]
Action 7: weakening rules for bank capitalization to help waft money into Labour’s schemes
The Prudential Regulatory Authority department of the Bank decided to reduce the amount of capital that banks must hold as a loss cushion when they make loans into infrastructure projects, such as the ones planned by Great British Energy and the National Wealth Fund.[11]
One frustration – caused by Labour’s mismanagement and by gilt yields shooting up
But there was one element in the Bank’s support for Labour that has been frustrated.
The Bank announed in September that it planned to sell out £100 billion of APF bonds in Labour’s first year of office, compared to £110 billion in the Tories’ last year.[12]
The Bank would have hoped to do that at the then-current gilt yields of 3.90% per annum for 7-year bonds (the presumed average remaining life of the bonds in the APF).
But Labour’s budget and general mismanagement have pushed gilt yields up.
Selling £100 billion of 7-year bonds to yield 3.90% when the bonds had a coupon of 1% would have produced an annual loss of 2.90%, and a £20.3 billion loss in all.[13] That is a loss smaller by £11.4 billion than the one deriving from selling £110 billion of 8-year bonds a year ago under the Tories when gilt yields were 4.60% and the bonds still only had a 1% coupon. An annual loss of 3.60% over eight years would have sent a £31.7 billion loss to Jeremy Hunt for the Tories to chew on, hemming in their spending plans, slowing the pace of the recovery, and widening the door for Labour to take office.[14]
Unfortunately, thanks to Labour’s insanity, the 7-year gilt yield has shot back up to 4.40%. The loss will be nearer £23.8 billion than £20.3 billion, a reversal of £3.5 billion.[15] This reduces the headroom which the Bank wanted to create for their alumna Rachel Reeves from £11.4 billion to £7.9 billion.[16]
Conclusion
Pesky financial markets are not behaving as they should. They unhelpfully react to economic data instead of to the alt-reality propounded in speeches by Bank officials and communiqués from HM Treasury. These are co-ordinated and bear testament to the Bank’s active and tacit endorsement of Labour’s insanity, in sharp contrast to their interdiction of Tory policies. This interdiction was enabled by the Bank’s awarding to itself an expansion of its powers. Normally that is known as a coup d’état.
[1] https://www.lyddonconsulting.com/we-had-a-labour-economic-government-for-14-years-called-the-bank-of-england/
[2] https://www.bankofengland.co.uk/speech/2024/november/dave-ramsden-speech-on-monetary-policy-at-the-university-of-leeds
[3] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/august-2024
[4] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/november-2024
[5] https://nsandi-corporate.com/news-research/news/nsi-announces-rate-changes-some-variable-and-fixed-term-products#
[6] (£695 billion x ¼% x 86/365 days) + (£659 billion x ¼% x 13/365 days)
[7] £659 billion x ½% x 1/365 days
[8] https://www.bankofengland.co.uk/weekly-report/2024/23-october-2024
[9] https://www.telegraph.co.uk/business/2024/09/24/reeves-prepares-rewrite-fiscal-rules-unleash-50bn-spending/
[10] https://www.bnnbloomberg.ca/business/international/2024/09/23/rachel-reeves-promises-real-ambition-in-uk-budget-next-month/
[11] https://www.bankofengland.co.uk/prudential-regulation/publication/2024/september/implementation-of-the-basel-3-1-standards-near-final-policy-statement-part-2
[12] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/september-2024
https://tradingeconomics.com/united-kingdom/government-bond-yield
[13] £100 billion x (interest loss of 3.90% – 1% coupon on the bonds =2.90%) x 7 = £20.3 billion
[14] £110 billion x (interest loss of 4.60% – 1% coupon on the bonds =3.60%) x 8 = £31.7 billion
[15] £100 billion x (interest loss of 4.40% – 1%) x 7 = £23.8 billion
[16] £31.7 billion less £23.8 billion