Annual growth in the money supply hits a six-year low

DECEMBER might have experienced sharply accelerating inflation but the supply of broad money (M4) in the economy fell at the fastest monthly pace since records began in 1982, new data from the Bank of England revealed yesterday.

The supply of broad money, which measures cash, current account deposits, savings deposits and time-restricted deposits, fell 1.1 per cent last month, taking the annual growth rate down to 6.4 per cent, the lowest such reading since October 2003.

The weakness of the preliminary data is likely to concern the Bank of England, said IHS Global Insight’s Howard Archer. Money supply growth was described by Bank governor Mervyn King earlier this week in a speech as already “undesirably low”.

However, the Bank of England is expected to reserve its judgement until the second estimate, which will include its preferred measure of the money supply.

But given that inflation is already high and next week’s GDP figures are expected to show a return to growth, the Bank is unlikely to inject further liquidity into the economy.

Richard McGuire, senior fixed income strategist at RBC Capital Markets, said: “We continue to expect the Bank will opt not to extend the current £200bn quantative easing limit on 4 February but see these data as supporting a possible cut in its deposit rate.”

This would effectively signal a shift in strategy from targeting the stock of money to its velocity, he suggested.