"The Bank of England's decisions having such large fiscal implications at a time where the chancellor wants to be fiscally tight is clearly not helpful. Furthermore, the losses the central bank makes are gains for the private sector, funnelling billions of public money into commercial banks and the financial sector." - Dominic Caddick, NEF Economist.
This week’s quote pertains to the deep dive, as usual, and I get right back into the Quantitative Tightening mess.
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Donald, Donald, Donald. It could have been such a momentous week personally if the gong had gone his way, but the Nobel Peace Prize will have to wait at least one more year. As usual you can hardly accuse him of puffery, having put an end to 3000 years worth of tension this week (as is his claim). In seriousness, the one word you can’t countenance about the man, I feel, is “warmonger” - I’ve heard it slung around a few times this week, but evidently it simply isn’t true. I don’t think I need to spend any time debunking that.
Having played a significant part in getting the Gaza situation to ceasefire and in the early stages of the 20/21 point plan that’s been laid out, Trump’s version of events is that after the Venezuelan opposition leader María Corina Machado was awarded the Nobel, they spoke on the phone and she told him he should have won it. I would keep your eyes open for next year, personally. The betting markets had a separate favourite (a Sudanese organisation) right up until the end, and Trump was given around a 20%-25% chance - so it perhaps wasn’t the “shock” the White House has made it out to be. All part of the veneer, of course.
Still, the headlines were stolen again late on Friday as we reverted back to the word of 2025 - tariff. A beautiful word, we were told. Not to the day traders who held long positions on Friday - a bloodbath ensued after a relative essay on Truth Social was published by the Prez, regarding China’s material dominance and overall behaviour towards, well, everywhere else. A letter had upset Mr Trump and others. Essentially, it comes down to China seeking strategic control of their supply chain and protecting their semiconductor manufacturing industry by whatever means necessary, it seems; that seems to be the next arms race that’s well underway (AI and computing power). I saw a stat this week (and did not have time to attempt to establish the veracity of it, I should add) - without AI-related growth, US GDP growth so far this year is 0.1%.
The US are not the only ones making noise here, though. This is not smoke and no fire. The EU, South Korea, and Japan, have already spoken on this matter and are not happy for a variety of reasons. Once again - as in the pandemic when the revelation that 90% of US pharmaceuticals were made in China at the time hit the headlines - a dependency on a Chinese supply chain is shown to have geopolitical weaknesses at the top level, and the drive for the lowest cost has hidden costs downstream. The economist in me looks at this and thinks one word……inflation.
What did the Trump essay mean? A market bloodbath with NVidia leading the charge, cutting over $200bn from its valuation. The overall market haircut was over a trillion dollars. Welcome to 2025, where one tweet costs the world’s wealthy one trillion dollars (aside from those who might have traded before the tweet went out, of course - did I say that out loud?).
Mr Trump highlighted that this was a strange day for China to choose given the Middle East situation, and those of us who have been around long enough would be inclined to agree - never believe in coincidences.
Meanwhile, after these two momentous events, the US Government shutdown continues, with 4000+ layoffs suggested across Government departments in the interim. Trump’s approval rating amongst low-income voters is down from 40% to 35% according to recent polling, which also shows that more disapprove of his handling of the economy and the shutdown than approve of it. Higher income groups have a higher opinion of him, however, than they did before.
Many have pointed to the continued deployment of the National Guard (this week - Chicago) as an action not congruent with a Nobel winner. The New York AG Letitia James was also in the lawfare crosshairs herself - having got stuck into Trump in 2023, her time came to defend a rental property that was on a resi mortgage (as I understand it). The case - that she paid a lower interest rate than she otherwise would have done. The penalty? Up to 30 years jail time, up to $1m in fines. The reality of the situation? Tit for tat. My thoughts at the time were simple: If you come for the King, you better not miss. You can’t suggest for a second that it won’t make some others think twice before tangling with the Orange Man.
What is the continuing narrative? High-octane, high-pace, high-risk stuff from the Donald. I am stunned investors are not more nervous, and also stunned there hasn’t been more fallout from some of these “plays” as yet. The realistic short term impact is that US growth is a few clicks lower than where it otherwise would have been - always hard to prove, because what’s happened has happened and the rest is modelling, but the tariff situation alone has cost households and sent more money to the US coffers. Don’t get me wrong - they need it - so it is in reality a balance between growth and the deficit - and is about protectionism and a shift away from globalisation, which many would say is vindicated by the Chinese approach to the modern world.
Phew - transatlantic back to the safety of the real time UK property market. Chris Watkin dunks another one - Week 39 in the can. Listings printed 34.3, down 1000 on last week, as the market quiets after the typical September glut. My “10% more stock than a normal market” ready reckoner continues to work on the back of circa 2 years of overperformance in listings compared to historical averages. There have been 1.41m homes listed this year so far! We are 10.4% ahead of the 9 year average, but that does include 2020 which pollutes the figures somewhat. We are really inching back towards the 2024 numbers now, week by week, having been 6-7% above them at various points in the year - but we are still listing more than we are selling (as always), so it is all eyes on the withdrawal rate as a general rule. We are only 2.4% ahead of the 2024 listings YTD now, but are still 10% ahead of the 2017-19 average.
Price reductions in week 39 - 25.6k. September’s completed number was back to 14.1% for reductions - August’s 11.1% now looks a summer anomaly as the numbers came back to the 14.1% reduced in July, 14% reduced in June, in comparison to last year’s 12.1%, May’s 13.4%, and the 5-year average of 10.7%. 2025’s average is 13.2%. More stock, more reductions - absolutely and relatively. 22% more reductions than the 5 year average, if you take the difference between 13.1% and 10.7%. “25% more reduced properties than a normal market” also works as a ready reckoner, or is likely to even be an underestimate just because of the amount of stock out there. We’ve still had more than 100k price reductions in the last month. Can’t find a deal? Just keep the legwork up and you’ll get there. You don’t tend to see 13%+ of stock being reduced in strong markets, by any stretch.
25.6k homes sold subject to contract, healthy enough. The 2025 average is 26.1k. Week 39s on average print 25.7k (over the past 9 years). SSTCs are up 5.3% year on year and 13.3% on 2017-19, and still nearly keeping pace with 2022 (we’ve passed the “day of the lettuce” and now into aftermath territory). With SSTCs up 5.3%, whereas listings now are only up 2.4% on last year, this signifies more “intention to transact” than 12 months ago, to this point in the year, for sure - or, put a different way, comparatively this looks like a more functional year than 2024 was (even though stock numbers have continued to rise throughout the year due to relentless listing).
We went into October with 751,797 homes on the market - an increase of 15k on 1st September’s number. September is usually a rise in most years, so there’s nothing unusual here. We aren’t back to the 763k peak at the beginning of August. The trend continues, and this week we had more SSTCs and fewer listings than the week before. Let’s see how that continues to play out throughout October. It still feels like that 763k will be the cycle peak now.
For context, as the market got stickier before the pandemic that number was c. 660k, a sellers’ market is more likely to be under 600k. At the end of September 2024, 723k were on the market. Ongoing figures will be interesting as we don’t watch the number of properties withdrawn from the market week-on-week. There were only 4% more properties on the market on October 1 2025 compared to October 1 2024, but the 2024 number was already the 8-year high.
Chris also looks at the per square foot on sold STC properties but has not yet released September’s number. The first few days of October saw a sqft pricing on sales agreed of £336.54 which is lower again - the previous numbers for context: August was at £338.78/sqft and that was 1.41% higher than August 2024 and 14.25% higher than August 2020 - but down 2.2% on June’s SSTC number of £346.45 and down 1.75% on July’s number of £344.78. This is a pretty dramatic drop and will start to play out in early 2026 numbers, when the figures hit the land reg, down into the 1.5%-2% region for 2025 (it isn’t quite an exact science, although these figures are the most helpful of all of them out there). Let’s just remember that October number is 3 days worth of sales before we get carried away! Next week I’m sure there will be more meat on these bones.
Fall throughs stayed slightly above the long-term average of 24.2%, printing 24.6% - there’s still been very little volatility around the long-term average for many weeks now. The net sales were solid - 19.4k, 4.5% up on last year and 10% higher than 2017-19 - not quite at 2022 levels (about 6k behind, now, total, edging closer week-on-week, with there soon to be a big catch-up with the 2022 post-mini-budget market meltdown coming up) - there’s now no doubt 2025 will outstrip 2022 with it being so close and the last quarter of 2022 being quite so poor post-lettuce.
Chris’ bonus content this week was London versus the rest of the UK - over August and September, the sales agreed to listings ratio in London was 40.8%, versus the rest of the UK which was 75.4%. It gives you some real context as to how slow and difficult the London market has been. Now - I’m not that enthused by the fact that this analysis includes August, but I hope he expands this once October is in the books and on an ongoing basis. However - the summer showed a much larger slowdown in London than it did in the rest of the UK as well.
I always give Chris a weekly shout out here because he’s more prolific than “just” this epic tome he releases weekly on the UK property market - he comes up with some great stats on a regular basis. Drop him a like, subscribe, and all the rest of it and some kind words for his content creation. If you are in the industry and want support in growing your business or to be a more effective communicator/be more in touch with your local market - that’s his core business - give him a shout. The article gets published on the Property Industry Eye website, and the video on his YouTube channel - @christopherwatkin
- It’s time to be “so macro” - the Construction PMIs were out this week (as was the KPMG/REC report on jobs from the same source, so I will look at both). Halifax released their price index. The RICS residential market report was also out. Those three pretty much choose themselves. Last up? Gilts and swaps, yes of course.
Construction PMIs. Output is still falling, but “falling at the slowest pace for 3 months”. Nearly positive, which is hard for a print of 46.2. Last month was 45.5, though, and before that we were sub-45, so it is a fair assessment. This 46.2 breaks back to 46.8 for resi building, 46.4 for commercial work, and 42.9 for civils. This is 9 months below 50.0 in a row now. That also coincides with 9 months in a row of lower employment numbers. Their expert commentary? The downturn in orders was the “least bad” so far in 2025.
Business activity expectations for the next 12 months? Worst since the end of 2022. Bearish or what? They have not yet seen the bottom, it seems, and are waiting for that before getting more optimistic. Bit of a self-fulfilling prophecy! Energy security and infrastructure were highlighted as the positive areas of growth, but once again the looming budget has prevented significant capex commitments from being made in September in construction. The 9 months of job shedding is the longest consistent period of job shedding since the pandemic, is the closing sentence.
How about the jobs report? I am guessing expectations will be quite low here! Once again, positivity amidst the misery. Permanent placements declined, yet again, but at the slowest rate for a year. Has the job market nearly absorbed, or absorbed 70-80%, of the employers’ national insurance shock? It sounds plausible. Starting salaries are close to stagnant (which makes sense - the rest is going to the Government). Demand for staff is falling and candidate supply is rising - and you don’t need an economics degree or two to be able to tell what that means!
KPMG chief executive Jon Holt reported that CEOs are remarkably upbeat about future growth prospects but are focusing on AI, cyber risk and upskilling existing talent. He was clear that the Chancellor needs to build business confidence. The chief executive of REC suggested that pay rise trends have now been arrested and pointed out that these should no longer be causing any concern to Bank of England MPC members, when it comes to setting rates. Neil Carberry suggested that a pro-business pro-growth budget would have significant positive impacts. I hope he isn’t holding his breath! (I’m sure his tongue was firmly in his cheek!)
Halifax House Price Index next up. And up it wasn’t….indeed, the world fell apart according to some headlines, and Charlie Lamdin was shouting from the rooftops. The index was down 0.3%. This put their annual growth rate down to 1.3%. What did their head of mortgages, Amanda Bryden, have to say? She referenced the sideways market (only up 0.3% according to Halifax this year). Their first-time buyer figures show an average house price of £236,811 - up 1.7% year-on-year. She also wheeled out the usual party line about improving affordability (it is slow, but it is true).
Halifax has the North East up 4.8% and the North West up 3.9%. The South West, in comparison, is down 0.2%. Scotland is up 4.5% but Northern Ireland is still “winning” (depending on where you are in the pecking order, of course) at +6.5% year-on-year. London was +0.6%, South East +0.2% - just about in the black.
How about the RICS report? The print of -15 on the balance figure was the best for a few months. As the headline, RICS prefer “subdued momentum” as the correct description of the current UK housing market. Buyer demand and sales agreed are in negative territory (going backwards) and have been for 3 months, and they expect this to continue into 2026. This time round, the South East and East Anglia are the softest areas on balance, according to RICS.
The new listings balance was -15% as well, the second month of contraction on that front in a row. We’ve been seeing that pattern play out in real time thanks to the Chris Watkin figures - for a little more than a couple of months we’ve seen the 2025 listings come back towards the 2024 listings.
RICS believe that house prices are creeping lower at the aggregate level. There’s no evidence for this, but if you were heavily biased towards the South of the country, you’d see how this could be a reasonable claim. The 12 month sales expectations figure printed a negative number - -9% - for the first time since August 2023, which seems pretty bearish to me (although sales volumes are arguably surprisingly strong, so perhaps the surveyors just feel that it will be hard to really grow from here). On pricing, +12% think prices will be up in 12 months time (not exactly a huge vote of confidence).
How about lettings? Tenant demand changes, -1% according to the surveyors, compared to landlord instructions at -38%, as, in spite of RRB looming, that print gets worse and worse and is the most negative since May 2020 (which surely should be written off as an anomalous month). +23% see higher rents in the next 3 months, and 3% is the best guess at rental growth over the next 12 according to RICS.
- Let’s dive. The Bank of England financial policy committee had a meeting and there’s a report to talk about - that will also segue nicely into an interesting article that I was sent in the week by the author, which I’d like to get into - some answers for Rachel Reeves without causing any more “trouble” (by trouble, I’d define that as stunting growth with policies that punish the private sector, and therefore don’t achieve what they should because they then hurt future tax take by stunting that growth - as per policies of the 2024 budget).
I spend the vast majority of my Bank of England coverage time on the monthly Money and Credit report, because of its importance, and of course the rate-setting Monetary Policy Committee meetings. However, this week is about the “other” committee, the Financial Policy one, that has the remit of ensuring financial stability across the UK (another brief given after the horse had bolted, as you might imagine - but that’s the public sector for you).
The first sections are the standard practice these days - elevated geopolitical risks, fragmentation of trade and I’d probably go further and say de-globalization - a phrase we seem to be avoiding - what’s the problem? We trade with other countries, and they are struggling as we are struggling. De-globalization will also be inflationary, it already has been and it will continue to be so unless or until there’s a major strategic shift (I don’t mean the end of Trump 2.0 either, because China will still be China, for example).
Then - the bit that has many scratching their heads and a few shouting “fire in the hold”. In spite of all this, risk premia are tighter, not looser, and asset prices have been soaring. The AI bubble is a regular feature on a daily basis and the Bank recognises the risk “if the expectations of the impact of AI becomes less optimistic”. Surely they mean “when” and “by how much” (but they don’t want to either speculate or alarm people unnecessarily).
They then highlight defaults in the US automotive sector. These are linked to credit provided to low-income families in the Southwest US. The FPC is effectively saying “don’t lend money to people who can’t afford it” - which was a 2008 lesson, after all - even though some people are not keen on the politics of that. The FPC then points to rising bond yields worldwide - driven partially by expectations of yet more debt issuance. Some is also politically based (e.g. France). They also highlight questions over US Federal reserve independence - similar concerns to those I have highlighted over recent weeks and months - legitimate concerns, I would suggest.
The domestic market is gauged as “resilient” but facing continued pressures from the cost of living and higher borrowing costs. Fair. The FPC concludes by saying that it is doing its job - in that the UK banking system will not blow up if economic and financial conditions got substantially worse than they are expected to.
What didn’t make it into the summary? The Bank’s discussion paper “Enhancing the resilience of the gilt repo market”. Whilst this perhaps doesn’t sound as much of a page turner as Jilly Cooper’s “Riders” (RIP), this is a welcome discussion area given the importance of the gilt repo market to the system (in the repo market, a bank borrows against gilts as security from another bank who has cash, when the first bank wants the cash for a short term basis - such as a week, for example). It might be overnight, it might be weeks or months. A lot of this focuses around market-makers and margins of safety when the doo-doo hits the fan, and also has the notion of “minimum haircuts” included. Bedtime reading if ever I saw it!
How about the solution to the “current Black Hole” as those of us who remember Rachel Reeves’ empty promises after the 2024 budget now call it, in an effort to stay as cheery as possible with the next chapter of “more tax for landlords” (Is there a business there somewhere? Probably not) looming? I imagine Rachel is currently thinking “thank goodness I said only one budget a year” - I shared a video of her on socials this week looking deeply uncomfortable recording some soundbites to the camera. I also had a disturbing conversation with a business partner whose CEO met her and - after that conversation - had absolutely no confidence in her economic ability. Rather than an internet meme takedown or a misogynistic comment - this one I’d take far more seriously. Hopefully she has in the past 12 months got more savvy as to which suggestions from the Treasury to take forward rather than another clumsy initiative like the Winter Fuel Payments saga.
The article - which is here, by the way, and thanks to John for sending it over: https://www.asocialdemocraticfuture.org/recyling-reserve-interest-income-for-public-purposes-not-a-free-lunch-but-now-a-necessity/ - gets into the idea I have raised a number of times, stopping the haemorrhage and horrific waste of taxpayer money that is achieved by selling gilts that are held by the Bank of England, alongside another solution which I’ve also discussed in passing as it has been raised by various political figures, including Nigel Farage and also Gordon Brown, amongst others.
Where’s the context? Well, this time round we are expecting a shortfall of £30bn (plus or minus a bit, what’s £10bn between friends) when the OBR publishes their forecast on the same day as the budget (November 26th). There are some huge riders to that - based on productivity estimates, growth and the likes - and we won’t know those until budget day. The influence the OBR wield is almost unimaginable - just one more thing to “thank” Gideon “George” Osborne for, the man who “learned economics on the job - ha ha”. A weapons-grade enemy of the private landlord.
In terms of debt borrowing, in spite of many negative headlines, until last month we were actually doing “OK” for a change - on forecast. That absolutely fell apart in August’s figures which were released on 19th September - showing that we’ve borrowed £11.4bn more than the March forecast. This was due to - mostly - according to the OBR - revisions based on increased borrowing by local authorities so far this year. Also - August VAT and other tax receipts were lower than expected. (£3.2bn lower, no small beer). Careless doesn’t really cover it!
The solutions to said Black Hole exist within the Central Banking system, is the argument. Firstly - interest on commercial bank reserves. Simply put, central bank reserves are mandatory to an extent. There are regulatory requirements for the amount of capital that you have to post (regulatory requirements that were tightened post-2008, and regulatory requirements that are more conservative than in the US, for example). The argument is that the commercial banks haven’t minded this anywhere near as much since December 2021, when the interest rate started to go on the rise, and obviously at one point were getting 5.25% on £800bn+ of QE-related reserves. Yes - the Bank had printed the money (in common parlance - in reality, they were electronically created reserves) and these reserves were the mirror image of the banks QE asset purchases (which were basically gilts).
So - if only the Supplement had the budget of the “Big Short”, I could cut to Margot Robbie at this point, but sadly, we have to press on with me. The Bank bought (say) £100m of gilts from a pension fund. The pension fund holds an account at a commercial bank. The Bank credits the commercial bank’s account with £100m that it has just created. There’s the new money. It receives £100m in gilts in exchange for that. If the vendor then wants more gilts to replace those gilts, it buys those gilts from either the secondary market or the DMO (the Debt Management Office) in a new issue, when that comes out (gilt auctions are held regularly). The £100m is now held at the Bank’s reserve account on behalf of that commercial bank (electronically), and the £100m cash payment is now in the pension fund’s account with said commercial bank.
Clear? I hope so. If it sounds like a bit of a work/move/scheme, well - that’s because it is. Pre-2008 commercial bank reserves were £20bn or so. By 2022 they were £900bn. Yup. So - that was costing less than a billion a year in interest when bank rates were 0.1%, but at 5.25% it was costing north of £45bn. That one really sneaks up on a Government, as you can imagine.
So - how do you get that down? Well, let’s think about three basic ways. 1) You get the base rate down. BUT - the Bank of England is independent and doesn’t worry about that £45bn, that’s not its job (yes, really). It worries about setting the correct rate of interest for the wider economy (well, when you put it like that, that does sound reasonable!). 2) You engage in Quantitative Tightening, but HOW you do it is an issue (particularly in terms of time horizons) - and these first two are to an extent related.
I’ll pause there before I get on to 3). If you tighten, that means “burning” money in the common parlance, or retiring these gilts and not replacing them with new gilts to keep the same amount of “extra” money in the system. If you sell them when rates are high, and you bought them when rates were low or ultra low - guess what, you’ve lost money. However, you stop paying out that interest on them as well. That’s “handy”, or - there’s a trade-off there. Lose £10bn today, or lose £xbn over y years, that’s the formula for consideration.
- Back to 3) - you lower the rate at which the commercial banks get compensated for holding these reserves. This has a number of effects - firstly, the banks are more motivated to use this money (make new loans to support economic growth, basically) - because having it sitting there doing nothing is no longer as lucrative (within regulatory frameworks of course). Then, the banks also seek to recover this revenue contribution, that their shareholders were ultimately enjoying very much, via other methods (increasing margins on lending and saving could be one of those areas, for example - which would hurt the vast majority of the population a little bit - some of us more than others!).
So - as always, there’s no such thing as a free lunch. The commercial banks don’t get as well rewarded for doing nothing as they do at the moment (they weren’t really rewarded at all for this between 2009 and 2021, if we concentrate solely on the base rate).
The second argument that John makes is one that he already knows I am absolutely on the same page as - and we share that with a smorgasbord of people who are from all sides of the political spectrum. Stop the quantitative tightening process which may well save around £10bn per year. This is where we actively SELL gilts, into the secondary market, at a massive loss compared to when we bought them. That’s because when we bought them they yielded between nothing and perhaps up to 2% (so they were priced at or very close to face value) and when we are selling them (or have already sold them, this started in 2022) we are selling them at lower values because yields are higher.
There’s very little reasoning outside of a heavy economics discussion as to why to be a net seller of gilts rather than just letting the gilts expire at face value. All it does is get the Bank balance sheet down faster than it otherwise would if you let them expire. The interest that you pay (to “yourself”, effectively, as a nation - from the Treasury to the Bank) is ultimately returned to the Treasury anyway.
Instead, I’ve advocated in the past for not only NOT selling these gilts into the secondary market, but actually BUYING gilts where there are arbitrages or anomalies in the market. For example, how about buying some 30 year gilts to take advantage of very generous yields? Guess what - this also gets the price of 30 year gilts upwards, and therefore yields downwards. This isn’t a “no issues” approach, however. Market manipulation by the largest single player might concern markets (personally I think they would just get on with it and take advantage, because I’m not suggesting the Bank employ Dr Michael Burry to sit in front of a screen all day and trade as he sees fit - when the Bank trades any gilts there is a huge amount of telegraphing that goes on, up-front announcements and the likes). What do they buy (in terms of duration)? How does this all work? There is one very simple move that the Government could make here, however - give the Bank a remit to deliver value to the UK taxpayer. If we bought some longs and mediums strategically, what would also happen, which often isn’t borne in mind in this argument, is what Japan has done for decades - yield curve control. If by buying some bonds at a low cost per year we can get our rate paid on our 97% or so of GDP debt pile, then we could be even bigger net savers on the deal - of course this needs more detailed modelling but it is perfectly possible……
Pause for a second though - there’s no such requirement to provide good value to the taxpayer for the Bank of England. When I’ve spoken with BoE individuals on this very issue, they are almost “cold” in their responses. “We don’t need the gilts any more, and so retiring the position makes sense”. What, even if it costs the UK £50bn+? That seems crazy, no?
Now - let’s be objective. If you are lowering the reserves that the commercial banks are keeping thanks to QT, then you are lowering the interest bill as well. In another way - rather than just capping/lowering the rate, as per the first point in the article (indeed, this is why the two situations are mentioned together) - this is not the only way to get that bill down, of course.
Then the moral argument (within the confines of the financial sector) - two potential positions here come to mind: 1) The commercial banks started this whole thing by being significantly responsible for the Global Financial Crisis, of which QE was a big fallout part, or 2) The private sector can’t be expected to mop up after the actions of the public sector - this would set a dangerous precedent.
You can see merit in both of those sides. However - there was a windfall tax on UK banks which Jeremy Hunt trimmed in 2022. The amount of revenue raised by this windfall tax was not anywhere near the national cost of the 2008 crisis. It still exists (the Bank Surcharge) and is a 3% extra rate on profits (down from 8% before Mr Hunt’s action). There was little fuss or fanfare (you may remember that there were other things to consider in his emergency budget of 2022!). Much as I was a fan of his strict approach (it was hard not to compare him to what had come before) when it came to getting the markets back on track, he could also have looked at the proposed solution of cutting the reserve rate, or a cap, knowing what the direction of interest rates would be. The Government - sadly - is never proactive, though. He still had time in 2023 and 2024 to make this right, though - just as Reeves could already have addressed this in 2024. It really is low-hanging fruit (even though I accept it may well be a bit technical to understand!)
I appreciate there is also a concern here when it comes to compromising the independence of the Central Bank. However, compared to moves across the pond, this is a technical solution to a clear problem that has haemorrhaged tens of billions of pounds. It would seem sensible, to me, to at least “have a go”.
My idea of also purchasing whilst gilts mature naturally could smooth any cliff effects that exist in the yield curve - often used as a counter to support active QT (selling of bonds into the secondary market at massive losses). It also means QE would be harder to use if we needed to use it again (bearing in mind we used it on the back of a 75-year event (GFC) and a 100-year event (Covid), there’s a margin of safety there but I can’t deny the point). My counter, however, would be that why are we trying to unwind dramatic moves made on the back of a 75-year and a 100-year event within a few years? That’s not congruent. Taking 25-50 years would seem MUCH more sensible, no?
Let’s get on to the other points in support, if they are needed. How about the fact that the current tactics RAISE gilt yields, rather than lowering them - by pumping artificial supply into the markets, this will always get the price down (and the yield up). The Bank has been criticised all the way through (by me, and others) for “marking their own homework” on this issue - some months back I shared a financial times article which has gained notoriety in this area, where the Bank’s estimated “10 to 15 basis points”, 0.1-0.15%, estimate on the amount of extra cost (and let’s be fair here - that is STILL around £2.8b-£4.2bn per YEAR), was shown to be far too low using other international comparable examples - and the cost on the longer bonds was shown to be closer to 0.7% (so the Bank was out by a scale factor of 5). The Bank has now admitted they were likely wrong about the range. Consequences? Zero (aside from the cost to the public purse, of course).
Did Jeremy Hunt understand this and ignore it? How about Rachel Reeves? Only they could answer that. What I can tell you is that there will be a dozen people in the “machine” that absolutely DO understand this argument from the Governmental angle. They may not be the highest skilled orators. They may not be the most influential. That is a crying shame, because - for me at least - the pros drastically outweigh the cons of doing this whole thing a different way.
How else can you attack the “sell now” QT side of the argument? Well, if you think rates are coming down, that’s a reason to not sell because the spread between the longer term loss and the loss now is lower. In plain English - we bought high and are selling low, and we just don’t need to do that.
More evidence, if it were needed? Well, it was 2022 (BEFORE Truss was “elected”, as I’ve made the point before) when the Bank confirmed they would follow this stupid policy path, and indeed they had to pause it when Liz and Kwasi did what they did. Indeed, they didn’t just pause it - they had to do what I suggested and intervene to BUY gilts, to restore confidence in the market and control the yield curve. On that trade as well - guess what - the Bank made money for the Treasury. £3.8bn, as it goes. What could we learn from that……and why does no-one ever ask that question. THREE POINT EIGHT BILLION.
This is a case where the middle ground can have an impassioned argument, then. What to do/what to aim for? Minimise the expected lifetime cost to the taxpayer of QT subject to not compromising market functioning and monetary goals. Get rid of shorter dated bonds when possible - or simply don’t sell them. Sell ONLY when the Net Present Value of the trade is POSITIVE for the taxpayer (publish the framework, carry vs crystallisation, so that it can be taken into account by the OBR, for example). “Lose” a pound today only when it saves more than a pound (inflation adjusted) tomorrow. You can probably tell that my position is further away, on the other side, from the middle ground.
Who is to blame, then? Ultimately, the Government. The Bank is left doing “Bank things”, lost in the theory of Economics. The Government gives them their briefs, and they need to get their heads around this and right the wrongs from 2022 onwards here - and, in doing so, find a right few billion quid (as the article argues!). Common sense - not very common, as you know.
So - rather than just sticking with QT, back to the point around the commercial banking reserves. Farage sees this and just claims it is simple - a Trump-style solution - no interest for commercial banks on reserves held at the Bank of England. That saves (at today’s base rate of 4%) about £26bn per year (it was more before the election when the base rate was so high, about £40bn or so - and the gilt facility was still higher). My concern remains that the commercial banks seek to make this money back rather than just “taking it on the chin”, since that’s how business tends to work - and they do that by raising margins on lending and saving, which hurts everyone “a little bit”.
So far we’ve lost about £22bn in the difference between the interest saved by selling the gilts and the losses we have actually booked. About £45bn in losses and about £23bn in coupon payments “saved”. The likely cost to gilts that are being sold in the moment at rates that are too high (the Bank has quietly upped its estimate of the cost of the QT programme to 0.15%-0.25% now, by the way, with the cost - particularly if you take into the account the higher cost of longer bonds - of “high single figure billions per year”. Call it £7.5bn. I hope you will see why I get quite so exorcised about this issue!
The ultimate conclusion - this is NOT the smartest way to unwind quantitative tightening - do it mechanically and it loses money (what we’ve done so far and are still doing) - do it intelligently could SAVE money.
Back to the other point, anyway, for completeness. How about the Bank Rate being tiered, rather than just scrapped, as Farage has suggested. Gordon Brown is one who has suggested this - maligned more than usual at the moment as Gold passed $4,000 per oz this week, with a throwback to his classic sale of gold reserves at a low ebb for Gold (and, perhaps more importantly, as Central Banks around the world massively increase their Gold holdings, mostly because of their lack of faith in the dollar compared to a year or so ago).
The European Central Bank only pays the policy rate on tiers of reserves, and excess tiers earn 0%. Think of this as a punishment for having reserves that are too large (although whose fault is that, when there’s been QT - back to that more “moral” argument). The Swiss National Bank does the same. The Bank of Japan pays the policy rate on a small portion, and 0 or even a negative interest rate on the rest. If you are going to adopt a long-term position where unwinding takes far longer (as per my suggestion) then the Japanese system is likely the one to follow, simply because they have 30+ recent years of experience of doing this whilst maintaining monetary stability. This isn’t the same as advocating for 200%+ of GDP being held as debt, please note - but more the only way to manage such high gross debt levels in a post-industrial economy.
You could, otherwise, simply ramp the windfall tax on banks back up to recover this money, of course. The issue there is that the windfall tax (bank surcharge on profits) was only raising a couple of billion extra per year when it was at 8%, so it is nowhere near the £25bn+ still going out of the door on the basis of the reserves. So - I think just leave that one where it is, personally.
The next step in actually doing something about this would be to brief the commercial banks that you are thinking about moving to a tiered system, with 0% being paid over and above the reserves that are ultimately set by the regulators, which are governed by the Bank of England. Let’s see what they say about what they would do.
Where does John Newton, author of the article shared in the first place that started this whole rant (!), sit on the solutions side? John’s got a long and illustrious history working in public policy, housing, PFI and lots of interesting areas. Cap the interest at 2% (rather than zero, as per the above) - less dramatic than the Japanese solution, but the Japanese economy has lived at very close to zero interest rates and zero inflation for over 30 years (changed in the past few years, mind). John uses the numbers from the IPPR recent publication “Fixing the leak” which are certainly credible. Saving from this? £35-£40bn this parliament. We are on the same page on pausing gilt sales, saving (according to the IPPR) £10bn+ per year, although my “active buying” solution is more radical.
John feels we can tax windfall-wise or tier, but I think the political noise around this is better at the tiering (saving the taxpayer money) and pausing sales argument, than the “tax the banks” rhetoric, although to an extent this is about how you want to “land” politically. As I say, a windfall style tax would need to be so much more aggressive than the Bank surcharge, that doesn’t make a lot of sense.
John is also “happy” to an extent to compromise the BoE independence by making the Bank and the Treasury jointly own the public implications of the Asset Purchasing Facility and Quantitative Tightening - and I’d agree with this. A risk worth taking, and a “special project” on the back of an extreme response to two large and genuine crises. My solution I’d call more “Net QT” - i.e. the point is that the amount of bonds held by the Bank goes down every year, but there is some buying and some selling within that framework. The time horizon that’s acceptable is decades, not years. It isn’t “permanent” but it plays the game, as currently framed, certainly within the OBR’s five-year timeframe which is ultimately how we run the public finances.
He also advocates for stronger scrutiny from the Treasury Committee of the link between fiscal and monetary policy. We might disagree here - but that’s because, in all of the committees I have listened to when the Bank are in front of the MPs, I’ve only heard about two or three voices on the committee side that really give me any confidence at all that they understand what is being said, and what the implications are. His final point, really, is to improve communications with the public so this is actually understandable. I’d love to get some feedback, because I try to boil these issues down into something that is understandable (and my personal belief is that this is very hard for non-nerd types who have studied economics for a long time, partially because there are parts in the system that do sound like they are, frankly, a bit of a ponzi, and people think “well, that can’t be right” - but it is). There should definitely be a set of Ray Dalio-style videos explaining this; we have to rely on Ray’s “How the Economic Machine Works” as the best example of making that knowledge remotely accessible.
Ultimately, wherever you land between John’s (very sensible) position and my (more radical) position, doing SOMETHING would be demonstrably better than the status quo for a well controlled and limited amount of risk. Unlike, say, the 2022 budget……
By the way - the ultimate irony? Had Liz understood all of this, this would have saved the vast majority of the £45bn that she wanted to spend in unfunded tax cuts on an annual basis. What a sausage, eh?
One more piece of context that is important here. What are the annual profits of commercial banks in the UK? Once again, we are at about £40bn. So - if you take away the excesses here - do you just have an inherently unprofitable commercial banking sector? Well, there’s an easy answer that fits into the “Rules of the game”. Taper it down over 5 years. Why 5 years? Well, it enables the OBR to take it all into account by the end of the forecast period……
Back to the enforced behavioural change argument, then. What would they do if you did remove this massive risk free windfall they have been benefiting from over the past few years? After all, they didn’t have this windfall between 2009 and 2021? They did have support in terms of initiatives like “funding for lending”, of course (not exactly the equivalent of “help to buy” for housebuilders).
I turned to “today’s oracle”, GPT, to forecast what the change in behaviour might look like in their opinion. What did it think? A PR campaign on “policy confusion” would come out, with the Government taking the blame for higher interest rates on mortgages and lower interest rates on savings. However, it suggested returns on equity would fall from 10-12% in banking to 6-8%. Basically - a shareholder and FTSE haircut, because a free lunch has been withdrawn?
How MUCH higher in terms of rates, and how MUCH lower in terms of savings? It suggested 0.05% - 0.15%, so very much not a big deal. If you follow through on my arguments above, that same level of saving could be achieved on the entire pile of the national debt, if not more, if we were more intelligent about QT. More cost-cutting and branch closures? Sure - but any excuse, right, and the regulatory framework and the Banking Hubs solution will protect consumers (although jobs will be lost a little faster, but this will not be major). Lobbying - don’t get me wrong, I’d fully expect to be nearly assassinated for championing this idea if I was anywhere near Westminster. Luckily for Lloyds et. al., that isn’t happening any time soon.
I went into full “deep research” mode here via GPT. If you’ve never tried it, you really should. What did it pull out here? £42bn in wealth transferred to UK banks in 2023 alone. Changing this with the 2% cap would cause “recovery” via changing lending and saving margins, as has already been said. Can’t they just lend more money out (the commercial banks) - not necessarily. They might have to put some more effort in, though! They may alternatively deploy liquidity into other assets. There is a theory that credit could get tighter for riskier segments though, meaning a lower overall loan growth - which would need to be reacted to or potentially even “incentivized” around, a bit like “funding for lending” to an extent.
GPT concludes that savers are highly likely to get a raw deal here (well, they are used to it after 2009-2021, right?). Now this is difficult (as I expand on the machine’s dissertation - 101 searches and 16 sources in 14 minutes, as it goes) - because, from a really easy economic perspective at the moment, we are “saving too much” as a country. Let me expand. Historically we were saving about 5% of our disposable income, second only to the US who often lag at around 3%. More recently, we have come back into the 10% category, having been at 12%. Saving is the alternative to Consuming - so, if we are not consuming, businesses are not growing and tax revenues are not where they would otherwise be. So - and politically you could never say it - GOOD, don’t incentivize the savers to save as much as they are currently saving!
Banks might also introduce fees for banking, as are common in many countries, rather than free bank accounts. Charges might just go up. This might also see more money go into riskier assets (as happened post-2009), which has mixed merits.
What about gilts themselves? Well, if idle funds only get 2%, and gilts return 3.5%+ - then banks are much more likely to buy gilts, no? Putting the prices up and the yields down, and having a positive offsetting effect……what’s not to like, here? GPT also suggests the revival of the interbank market, as banks seek better yields - working harder for the money……
This appetite for better returns, however, might leak into corporate bonds and more risky assets - causing more risk in a downturn environment. GPT also recognises the fact that margins will be squeezed at lenders and shareholders will get hurt. There’s also a very solid argument that the banks were fine pre-2008 and still fine 2009-2021, so this anomalous situation can be reversed without too destructive an impact.
Lower share prices, lower share buybacks, lower profit distributions for what is essentially unearned money that arose from the reversal of a situation that was engineered simply because of unscrupulous behaviour from…..commercial banks! There is a more nuanced argument that says retail banks will be hit hardest when they did not cause the majority of the issues in 2008, sure - but it is two sides that are highly inter-related, as a rule.
The more you look, the more you realise just how harmful the cut in the surcharge from 8% to 3% was, just as bank profits jumped so very much. If anything it should have likely gone the other way, but temporarily, so as not to cause structural damage because it was a 3-year hike (or similar) followed by a taper back downwards.
GPT’s efforts are so substantial I will at some point host them on the newsletter in this coming week so you can read it on its own merits! Seriously impressive. However, nothing in there makes me think that John’s solution (or a version of it) should not be strongly considered by the Treasury - it is very clear to me, both qualitatively and quantitatively, that it would be superior to the status quo and a low-risk calculated solution.
Now - as I draw this week to a close, the next workshop is prepared, and as we turn our eyes to 2026, the next workshop is online and available! We start the year with a bang, discussing strategic planning and how to get the most of the next 12 months, with some of our own methods and takes on productivity and time management, alongside systems and processes. The other half of the workshop is about the most common pain point in SME property businesses - accounts, bookkeeping and group accounting. This is about measuring asset performance - not “how to use Xero”, but “how to make the most out of financial information” - what should you be seeing monthly, and how should you interpret it properly and use it strategically to grow your business, safely but quickly? As always we have real life case studies about our own experiences, and close with our “no-holds-barred” Q+A. Anything individual to consider? Get a VIP ticket and join us for dinner, in a smaller setting with an opportunity to discuss any specific roadblocks or issues in your property business at the moment. Join us! Thursday 22nd January 2026; https://bit.ly/pbw9
Above all - please remember to Keep Calm, ALWAYS listen to or read the Supplement, and Carry On; there will be opportunities abound this year and towards 2030 and beyond - the landscape has been set for a surefire bull run. It will be slow(ish), and take a little while longer to get off the ground - and the amount of stock around is still keeping things suppressed at the moment - but as the market continues to improve slowly, it is a case of “here we go” in my opinion.
