All eyes on the BoE

21 Jun 2018

The Bank of England’s (BoE) MPC decision is due 12:00pm today.

We firmly expect the Bank rate will be held at 0.50%, albeit with McCafferty and Saunders again dissenting with calls for a rate hike (i.e. a 7-2 vote). A unanimous 9-0 to leave the stock of QE unchanged is almost certain. Previously, the Bank put its rate tightening plans on ice in May after a poor Q1 GDP print of +0.1% (qoq). Though put down to temporary factors by the MPC, it held off from hiking rates in May to see this confirmed in subsequent months. However, signs of a Q2 bounce back have not been overly convincing thus far, which is why we do not expect a hike until November 2018. Still, there is a possibility that the minutes of the meeting (also published at 12:00pm) hint that an August hike is possible. This would represent a more hawkish outcome than markets expect and would likely see sterling appreciate and gilts sold off. A press conference will not follow today’s decision, though Governor Carney will be speaking later at the annual Mansion House banquet at 9:15pm.
May scrapes Commons win

The UK government scraped a narrow victory on the latest vote on the amendment to the Withdrawal Bill to give MPs a ‘meaningful vote’ by convincing most Conservative rebels to back it. The vote yesterday which would have permitted British MP’s to dictate to the government how to navigate negotiations in a “no deal” scenario was passed by 319 to 303 in favour of the government. Leading Tory rebel, Dominic Grieve, was eventually persuaded to back down from voting against the government as it appears that the UK government has made some concessions to the rebel element in order to swing the vote.
SNB echo ECB’s caution
The Swiss National Bank have echoed the caution of the ECB at their June monetary policy meeting this morning. While Switzerland’s economy has fared far better than their European neighbours in the first half of 2018, the SNB remain wary of signalling any policy normalisation before their European neighbours. The currency move in EURCHF towards 1.2000 back in April was a welcomed by the SNB who have been combatting unwelcome appreciation of the franc since the start of the financial crisis. However the sharp drop back to 1.1500 around the Italian political uncertainty (which they specifically mentioned in their statement) will have served as a stark reminder to the SNB that their currency remains vulnerable to safe haven flows, and unwelcomed strengthening.

No doubt wary of the ECB’s dovish tone at last week’s meeting, the SNB have reiterated their commitment to the current low rate and willingness to intervene to weaken the franc if deemed necessary. The SNB have also amended their inflation forecasts slightly, raising near term forecasts, but lowering the outlook for 2019 and 2020. Most significantly however, even the longest term forecast is based on the assumption that the SNB will maintain its current low rates for the duration of the forecasting period i.e. out to the end of 2020.
The markets initial reaction has been slight weakness for the franc, with EURCHF rising 25bps, however market has already recovered to its pre-announcement levels suggesting that the SNB will have some work to do to continue to hold back CHF appreciation.
Irish Banks: Mortgage arrears fall again in Q1
The Central Bank of Ireland’s (CBI’s) latest Mortgage Arrears and Repossessions data show that arrears continued to decrease in the first three months of 2018, extending the run of industry-wide improvements (by mortgage balance) to 19 quarters. To start with the PDH (owner-occupied) segment, at the end of Q118 there were 728,575 mortgages in issue from the high street banks with an aggregate balance of €98.7bn. Of these, 48,538 (6.7%) of accounts with an aggregate balance of €10.03bn (10.2%) were in arrears of more than 90 days past due (dpd). Nominal arrears for accounts that were more than 90dpd were flat at €2.87bn, with long-term (>720dpd) arrears accounting for c. 90%. PDH arrears (as measured by the balance on accounts in arrears) peaked at 17.3% in Q313 but they have fallen by 710bps since then. As an aside, we note a slight q/q uptick in the number of accounts in arrears in Q1, the first rise since Q213, but this is attributed by the CBI to severe weather impacting some borrowers’ ability to make repayments over the counter. Given the strengthening economic conditions in Ireland we would share this assessment. Turning to the BTL (buy-to-let) segment, there were 121,029 BTL mortgages with a balance of €21.7bn in existence at end-Q118. Of these, 18,363 accounts with a balance of €5.1bn (23.5% of the total) were in arrears of more than 90dpd. Total industry-wide BTL arrears more than 90dpd were €2.05bn, with €1.87bn of these coming from the >720dpd category. The release also provides details on the banks’ efforts to address troubled loans. By the end of the quarter 117,334 PDH and 21,276 BTL accounts had been restructured, with the vast majority (85.9% PDH, 86.3% BTL) meeting the terms of their restructuring. At the end of Q118 the banks had a total of 3,641 residential units in their possession, which equates to 0.2% of the Irish housing stock. Some 259 properties were sold by the banks during the quarter. The banks also had rent receivers appointed to 5,935 BTL properties by end-Q1. Outside of the banks, the data also show the concentration of troubled mortgages held by unregulated loan owners. In Q1 such entities owned 2% of all PDH loans but 14% of all PDH mortgages in arrears of more than 90dpd (19% in the case of more than 720dpd). The latest decline in mortgage arrears is unsurprising given the broad economic improvements. However, the pace of improvement has been slowing in recent quarters, presumably because the ‘low hanging fruit’ of the least troubled mortgages have been substantially addressed.
Irish Banks: CBI comments on mortgage switching

The Central Bank of Ireland (CBI) is to introduce changes to the Consumer Protection Code aimed at providing additional transparency and facilitate mortgage switching. This follows measures introduced for variable rate holders in Ireland in 2016, with the new regime set to take effect from 1 January next. Research conducted by the CBI in 2015 suggested that up to 21% of borrowers at that time could save money by switching (note that rates have fallen since then, while switching has picked up off its admittedly low base). The CBI is bringing in six new measures, namely: (i) customers on fixed rates are to receive at least 60 days’ notice from lenders that they are about to come off their rates, along with information on rates on offer; (ii) SVR (but not tracker) customers are to receive annual notifications on whether a cheaper rate based on their LTV is available, subject to the provision of an updated valuation; (iii) lenders will be required to provide, on request, interest saving calculations on new products to borrowers; (iv) a time-bound mortgage application process is to be introduced; (v) the same consumer protections in relation to incentives will be extended to new, existing and switching mortgage holders; and (vi) the standardised pack of switching information is to include additional information for borrowers. The CBI has also signalled a greater monitoring of advertisements from credit institutions, noting that 75% of advertisements it recently reviewed were required to be withdrawn or amended.
Irish Banks: Scariff nears the finish line / a return for Mark Duffy?

The Irish Independent reports that Ulster Bank has shortlisted bidders for the final round of the tussle for its €1.6bn Project Scariff NPL book. Elsewhere, the newspaper also reports that the former CEO of Bank of Scotland Ireland (BOSI), Mark Duffy, is “seeking backers for a new residential mortgage lending business”. The Ulster Bank portfolio comprises about 3,600 PDH and 2,900 BTL loan exposures. The usual suspects from the PE world (Cerberus, Goldman Sachs, Oaktree and Lone Star) are all said to be running the rule over the book. Ulster has told lawmakers here that a sale is intended to complete before the year end. As we noted last month, the average own-occupier loan is in arrears of €52,000 and has missed an average of 43 payments, and 73% of them first entered arrears between 7-9 years ago. The BTL cohort have missed an average of 15 payments and are in average arrears of €31,000. There has been no indication as to what level of provisioning currently applies to the portfolio, but there is standard industry levels of between 40-50% for owner occupier loans and between 50-60% for BTL. This has proven to be a busy year for jumbo loan portfolio sales in Ireland, with Ulster’s Project Scariff joining the likes of AIB’s Project Redwood, PTSB’s Project Glas and Lloyds’ legacy BOSI book on the blocks. Such disposals are allowing institutions to increasingly shift focus to front book lending opportunities, but as with the press report about Mr. Duffy’s intentions, the competitive landscape in the mortgage market may soon include some new faces.
Irish Economy: Total employment reaches a new high
The latest (Q118) Labour Force Survey release from the CSO shows that total employment has reached a new post-independence high of 2.24m. This means that the high water mark of the Celtic Tiger period (Q407) has finally been eclipsed, albeit only by 600 jobs. Employment has increased by 2.9% or 62,100 in the past 12 months. The seasonally adjusted unemployment rate is now estimated to stand at just 5.3%, its lowest since February 2008 (it peaked at 16.0% during the recession). The lowest unemployment rate in modern times was 3.9% in Q400, so we are effectively at full employment now (this is further indicated by the uptick in wage inflation in recent times). The sustainability of employment today is markedly different compared to at the last peak. Construction accounted for one in 10 jobs in the economy at the end of 2007, due to the housing bubble. Today the sector accounts for one in 16 positions. Areas whose share of total employment have increased by more than 125bps in the past decade or so include IT, healthcare, education and accommodation / food service.
Irish Economy: Population to grow substantially by 2051
The CSO’s latest Population and Labour Force Projections envisage that Ireland’s population will grow substantially between 2016 and 2051. The highest of the CSO’s six scenarios projects a population increase of 1.95m (41%) by 2051, while even the lowest scenario foresees a population increase of 0.84m (18%) by 2051. The mean of the two central scenarios projects the population growing to 6.13m (+29%) in this period. The CSO’s projections use a combination of different assumptions of the fertility rate and migration levels. The fertility rate is assumed to i) remain at the 2016 level of 1.8 or ii) decrease to 1.6 by 2031, while net migration is assumed to vary between 10,000 p.a. in the low scenario and 30,000 p.a. in the high scenario. For reference, net migration was almost 20,000 in the year to April 2017. Should both variables remain at current levels (i.e. a fertility rate of 1.8 and net migration of 20,000), the population is expected to increase to 6.23m by 2051, a rise of 31%. Looking at shorter timeframes (and again using the mean of the two central scenarios), the CSO projects that the population will grow by 10% in the 10 years between 2016 and 2026 and by 8% in the subsequent 10-year period. As such, expected population growth is more weighted towards the relatively near-term. Turning to the labour force projections, the CSO projects that (primarily) demographic changes will increase the labour force by an average of 0.8% - 1.3% p.a. in the 15 years to 2031. The central scenario foresees a 17% increase (400,000 persons) over the period. The labour force will also gradually tilt towards older age cohorts, in line with overall demographic changes. By 2031, 31-32% of the labour force will be aged 50+, an increase from 26% in 2016. Such strong growth in the population and labour force as projected by the CSO is clearly positive for the long-term potential growth rate of the economy, while it also highlights the investment and infrastructure challenges that will emerge, particularly as previous releases have shown that population growth in the Greater Dublin Area will outpace the national rate.
C&C: CO2 shortage currently not affecting production

C&C is being minimally affected by the CO2 shortage across Europe that is impacting food and drink production. It is better placed than most as its Clonmel cidery in Ireland that produces Bulmers for Ireland and Magners for the UK has a CO2 recycling unit and so is largely self-sufficient and the supplier into its Wellpark brewery in Scotland that produces Tennent’s lager is currently unaffected by the production disruptions. That said, C&C now has a large distribution business and management notes that it is liaising with its product suppliers (e.g. Heineken and Molson) on how the CO2 shortage will impact its broader range of wholesale products, looking to minimise the impact. The CO2 shortage has arisen from an unfortunate coincidence where technical breakdowns in some plants has occurred at the same time as the routine shut down of other plants for maintenance. As such, while it is anticipated that the shortage may continue for a number of weeks it is finite with, we presume, work on plants shut for maintenance being expedited to ensure a quicker return to production.
Economic Releases

09.30    UK        Public Finances (May)

12.30    UK        Bank of England announcement

13.30    US        ADP payrolls