Cheer as supply of money rises

M4 money supply, the amount of cash in circulation in the UK economy, grew by £12.8bn in August, after a £0.2bn fall in July, official statistics published yesterday revealed.

This represented a three-month annualised growth of 4.5 per cent.

The data showed that in August, money holdings of private non-financial corporations (PNFCs) gained 0.9 per cent, pushing annual growth up to five per cent.

While the corporate liquidity ratio – sterling and foreign currency deposits divided by borrowing – rose to its highest level since the second quarter of 2007.

Excluding property companies, the liquidity ratio is close to the top of its range in recent years, supporting hopes of a further pick-up in business investment and hiring. Monetary expansion also continues to be supported by an influx of foreign funds – overseas investors bought £9.5bn of gilts and Treasury bills in August, bringing the year-to-date total to £62.1bn, while “monetary financial institutions’ externals” contributed £15.1bn to the increase in M4.

“August monetary statistics are encouraging, suggesting a continued economic recovery and arguing against more quantitative easing,” said Henderson’s Simon Ward.

But Alan Clarke at BNP Paribas said money supply growth was “too slow” and that combined with weaker service sector output GDP growth in the UK could falter in the second half of the year or even go into negative territory.

Monetary Policy Committee member Adam Posen raised the possibility the Bank may have to restart its policy of quantitative easing again on Tuesday saying the UK faced a long period of sluggish growth.