Hello again and a Happy New Year to you all. That theme links to today’s subject because the research student at the Bank of England morning meeting will have been hanging out the bunting for this,
FTSE 100 opens back above 10,000 The FTSE 100 rose 0.4% to 10,008.06, propelled by gains in heavyweight producers. Shell climbed 0.9%, while BP added 0.8%. The benchmark had already flirted with history last week, briefly breaking above the 10,000 level for the first time. (Share Talk)
We first broke above 10,000 on Friday and for central bankers this is all about Wealth Effects as the room echoes to every single voice independently deciding to say “Well played Governor”. Of course whilst this is welcome for ordinary people with investments and pension plans there is also an element of again boosting the very wealthy or also some asset inflation. The enthusiasm for the stock market news will be added to by this from Friday.
UK house price growth ends 2025 on a softer note ( Nationwide)
That is the sort of news that junior staff fear as no-one wants to be associated with weak house prices. They could try repeating the Nationwide presentation.
“UK house prices ended 2025 on a softer note, with annual price growth slowing to 0.6%, from 1.8% in November, the slowest pace since April 2024. The high base for comparison can partly explain the slowdown (annual price growth was a solid 4.7% in December 2024), although prices fell by 0.4% month on month, after taking account of seasonal effects.”
The problem is that in doing so you have to admit that prices actually fell which in central banking terms is like walking on an IED. In fact things are so bad the word “resilient” is deployed which for newer readers is something that in the case of banks has an awful habit of being followed by it collapsing.
“Despite the softer end to the year, the word that best describes the housing market in 2025 overall is ‘resilient’. Even though consumer sentiment was relatively subdued, with households reluctant to spend and mortgage rates around three times their post pandemic lows, mortgage approvals remained near pre-Covid levels.”
Mortgage Rates
This area is a really uncomfortable one for the Bank of England which only last month did this.
At its meeting ending on 17 December 2025, the Monetary Policy Committee voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 3.75%. Four members voted to maintain Bank Rate at 4%.
One way of looking at this is our five-year yield which at 3.95% sends its own message by the simple fact that it is higher than the present Bank Rate when at least one more interest-rate cut is expected.In terms of economic theory we have seen an element of what is called “pushing on a string” where bind yields have not fallen as the Bank of England will have hoped and expected. That is reinforced by its own release this morning.
The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages increased for the first time since February 2025 (4.53%), to 4.20% in November from 4.17% in October. The rate on the outstanding stock of mortgages was 3.90% in November, up from 3.89% in the previous months.
We have two pretty clear messages here and they are a rise in the recorded mortgage rate in November and again it being above Bank Rate which was then 4%. Plus you can add in the expectations of future interest-rate cuts and you can see that the Bank of England Ivory Tower would have been expecting UK mortgage rates to be a least 0.5% lower than they are.
UK bond yields
The problem above feeds also into an issue for both the UK government and Bank of England which is emphasised by the UK benchmark ten-year yield being at 4.52%. Whilst that is better than the worst days when it went above 4.9% another issue is the persistence of the problem. The UK government issues around £300 billion per year if we allow for maturities as well as new borrowing and we are doing so expensively. For example we sold a Gilt maturing in 2031 just before the Bank Rate cut in December at 4.09% and plan to sell more on Wednesday and it will be interesting to see at what yield.
For the Bank of England there is the ongoing problem with the £553 billion of UK Gilts it continues to hold. If it does nothing then even the lower Bank Rate at 3.75% is at least 2% higher than the yield it gets so it loses. But if it sells then it loses in some cases on a grand scale as in the worst case ultra-long Gilts are worth around a quarter of what was paid for them. As we mull how such frightfully intelligent people doing such widely praised things can go so awfully wrong well I did warn about it.
https://notayesmanseconomics.wordpress.com/2019/06/27/the-uk-should-issue-a-100-year-bond-gilt/
Money Supply
The next stop on today’s look at the UK comes with this.
The net flow of sterling money (known as M4ex) was £15.3 billion in November, compared to £8.8 billion in October, and the highest since January 2025 (£25.4 billion). This was largely driven by households and non-intermediate other financial corporations (NIOFCs) increasing their holdings of money by £8.1 billion and £6.1 billion respectively. PNFCs also increased their holdings of money, by £1.1 billion in November.
Months like this with double-digit growth have become more frequent and the six monthly average is now a bit above £10 billion. With the erratic nature of monthly growth I prefer the ersatz quarterly number which if you annualise it gives you 5.4%.For believers in nominal GDP targeting that may well be a Goldilocks style level. But with economic growth weak that poses I think an inflation warning for 2027.
That warning is reinforced by the fact that money supply growth is being reduced by the QT driven Bank of England balance sheet tightening.
At this meeting, the MPC had voted to reduce the stock of UK government bond purchases held for monetary policy purposes by £70 billion over the 12-month period from October 2025 to September 2026.
So money supply growth is on an underlying basis more like 6% which adds to the inflation warning.
Comment
There was some hope for immediate prospects for the UK economy from the PMI business survey on Friday.
December saw further signs of growth emanating from the UK manufacturing sector. Output rose for the third successive month and new orders increased for the first time since September 2024.
Care is needed as 50.6 is a weak reading, but hopefully there is some growth. Plus there were inflationary concerns.
December saw a mild increase in price pressures, as input cost inflation accelerated and output charges rose after declining in November.
We should see consumer inflation dip towards 2% as this year progresses as the boost provided by the 2024 Budget falls out of the numbers and is not repeated. The present oil price of US $60 for Brent Crude Oil would help if sustained. But the problem if we look at the money supply data is that to use central banker language it proves to be temporary and rises above 3% again in 2027.
Plus to mark your card the Bank of England is running out of road on QT in a similar fashion to the way the US Federal Reserve did.
Let me finish with this from Dale Vince from the 23rd of December.
If you’re dreaming of a White Christmas – dream on. Snow is fast becoming a thing of the past in Britain. The fact that it’s hard wired into our culture through massive events like xmas and into our memories – is really interesting. Because it’ll be harder and harder to ignore the fact we don’t get snow anymore, and the reason why – climate change. Obvs.
Meanwhile here is the BBC weather forecast.
Cold Arctic air remains across all parts of the UK today.
Further snow showers are expected for areas exposed to the northerly winds, especially northern Scotland, Northern Ireland, west Wales, south-west England and parts of eastern England.
The Met Office has issued various yellow warnings for snow and ice warnings in these region.