The key chart
Trends in cumulative financing flows to the UK private sector (12 months, £bn) (Source: BoE; CMMP)
The key message
The latest “Money and Credit – August 2023” data release from the Bank of England shows financing flows to the private sector collapsing in the UK – this story is not unique to the euro area (see “Choke Point?”).
Cumulative monthly financing flows to UK corporates and to households have fallen from £66bn in the 12 months to August 2022 to only £17bn in the twelve months to August 2023. If we include relatively volatile flows to non-intermediate financial companies, positive flows have become negative, net repayments of £42bn (see key chart above).
The average cost of borrowing for corporates has increased 494bp from 2.03% in December 2021 (when BoE rate increases began) to 6.97% in August 2023. In response, they have repaid loans in six of the past ten months, and cumulative 12-month financing flows have been negative for the past eight months. Behind the headlines, UK SMEs also face the extra “dual challenge” of lower lending volumes (negative YoY growth since August 2021) and even higher borrowing costs (7.65% average, up 514bp since December 2012).
The average costs of secured and other household borrowing have increased by 325bp (from 1.58% to 4.82%) and 280bp (from 6.27% to 9.07%) respectively over the same time-period. Households have repaid loans in two of the past five months and cumulative 12-month financing flows have declined from £64bn in the 12 months to August 2022 to £23bn in the twelve months to August 2023.
So what – why does this matter?
The BoE and the ECB lack playbooks for such aggressive periods of monetary tightening. Financing flows to the UK and EA private sectors are falling sharply and reaching a potential “choke point” for growth and much-needed investment. Central bankers may argue that this suggests that the transmission of monetary policy is working. Others might view such as rapid pace of adjustment as an indicator that the risks of policy errors and risks to future growth are rising very sharply…
Financing flows to the UK private sector are collapsing too
The latest “Money and Credit – August 2023” data release from the Bank of England shows financial flows to the private sector collapsing in the UK (see chart below).
The collapse in cumulative 12-month financial flows to the UK private sector (12 months to August, £bn) (Source: BoE; CMMP)
Cumulative monthly financing flows fell from £77bn in the 12 months to August 2022 to net repayments of £42bn in the twelve months to August 2023 (blue bars in chart above). This data includes volatile flows to non-intermediating financial companies. Excluding these, financing flows to corporates (PNFCs) and households (HHs) fell from £66bn to £17bn over the period (maroon bars in chart above).
Trend in the average cost of new loans to UK PNFCs (%) since August 2018 (Source: BoE; CMMP)
In response to the 494bp increase in the average cost of borrowing from 2.03% in December 2021 (when the BoE rate increases began, see chart above) to 6.97% in August 2023, PNFCs have repaid loans in six of the past ten months.
Despite two consecutive months of positive flows to PNFCs in July 2023 (£1.3bn) and August 2023 (£0.5bn), cumulative 12-month financing flows have been negative for the past eight months. In the 12 months to August 2023, PNFCs repaid £6.2bn in loans (see chart below).
UK PNFCs have repaid loans in six of the past ten months (Source: BoE; CMMP)
Note also that, behind the headlines, the average interest rate on new loans to SMEs has increased by 514bp from 2.51% in December 2021 to 7.65% in August 2023.
Trends in growth rates in corporate loans since August 2018 (% YoY) (Source: BoE; CMMP)
The annual YoY growth rate in lending to SMEs has been negative since August 2021 (see chart above). In short, SMEs face the dual challenge of lower lending volumes and higher borrowing costs.
Trend in the average cost of new loans to UK HHs (%) since August 2018 (Source: BoE; CMMP)
In response to a 324bp increase in the average cost of new secured HH lending (the largest segment of HH borrowing) and 280bp in the average cost of other HH lending (see chart above), HHs have repaid loans in two of the past five months. Despite a recovery in HH financing flows in July 2023 (£0.9bn) and August 2023 (£1.3bn), cumulative financing flows have fallen from £64bn in August 2022 to £23bn in August 2023 (see chart below).
Cumulative flows to UK HHs have fallen to £23bn in August 2023 (Source: BoE; CMMP)
Conclusion
The BoE and the ECB lack playbooks for such aggressive periods of monetary tightening. Financing flows to the UK and EA private sectors are falling sharply and reaching a potential “choke point” for growth and much-needed investment.
Central bankers may argue that this suggests that the transmission of monetary policy is working. Others might view such as rapid pace of adjustment as an indicator that the risks of policy errors and risks to future growth are rising very sharply…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.