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 – September 2023” data release from the Bank of England (BoE) confirms the sharp slowdown in financing flows to the UK private sector. This story is not unique to the euro area.
Cumulative monthly financing flows fell from £98bn in the 12 months to September 2022 to net repayments of £64bn in the twelve months to August 2023 (see key chart above). This data includes volatile flows to non-intermediating financial companies (the green columns). Excluding these, financing flows to corporates (PNFCs) and HHs fell from £64bn to £11bn over the period.
The average cost of borrowing for PNFCs has increased 460bp from 2.03% in December 2021 (when BoE rate increases began) to 6.63% in September 2023. In response, PNFCs have repaid loans in six of the past twelve months and cumulative 12-month financing flows have been negative for the past nine 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 (7.59% average, up 508bp since December 2012).
The average costs of secured and other HH lending have increased by 343bp (from 1.58% to 5.01%) and 246bp (from 6.27% to 8.73%) respectively over the same time-period. HHs have repaid loans in three of the past six months and cumulative 12-month financing flows have declined from £60bn in the 12 months to September 2022 to £17bn in the twelve months to August 2023.
So what?
As noted in previous posts, the BoE and the ECB both 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…
Tightening the UK choke hold further
The latest “Money and Credit – September 2023” data release from the Bank of England (BoE) confirms the sharp slowdown in financing flows to the UK private sector. This story is not unique to the euro area.
The collapse in cumulative 12-month financial flows to the UK private sector (12 months to September, £bn) (Source: BoE; CMMP)
Cumulative monthly financing flows fell from £98bn in the 12 months to September 2022 to net repayments of £64bn in the twelve months to August 2023 (see chart above). This data includes volatile flows to non-intermediating financial companies. Excluding these, financing flows to corporates (PNFCs) and HHs fell from £64bn to £11bn over the period.
Trends in the average cost of new loans to UK PNFCs (%) since September 2018 (Source: BoE; CMMP)
In response to the 460bp increase in the average cost of borrowing from 2.03% in December 2021 (when the BoE rate increases began, see chart above) to 6.63% in August 2023, PNFCs have repaid loans in six of the past twelve months.
Despite three consecutive months of positive flows to PNFCs between July and September 2023, cumulative 12-month financing flows have been negative for the past nine months. In the 12 months to September 2023, PNFCs repaid £5.6bn in loans (see chart below).
Trends in financing flows (£bn) to UK PNFCs (monthly LHS, cum 12 months RHS) (Source: BoE; CMMP)
Note also that, behind the headlines, the average interest rate on new loans to SMEs has increased by 508bp from 2.51% in December 2021 to 7.59% in September 2023.
Trends in growth rates (% YoY) in corporate loans since September 2018 (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 (see the “How can UK SMEs invest in growth and job creation…” series).
Trends in the average cost of new loans to UK HHs (%) since September 2018 (Source: BoE; CMMP)
In response to a 343bp increase in the average cost of new secured HH lending (the largest segment of HH borrowing) and 246bp in the average cost of other HH lending (see chart above), HHs have repaid loans in three of the past six months. Cumulative financing flows have fallen from £60bn in September 2022 to £17bn in September 2023 (see chart below).
Trends in financing flows (£bn) to UK HHs (monthly LHS, cum 12 months RHS) (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.