M4 money supply feels QE effect

THE supply of money in the UK grew at its fastest rate since the fourth quarter of 2007 in the three months to May as the impact of the Bank of England’s quantitative easing policy starts to be felt, data issued by the central bank showed yesterday.

The Bank reported that the three-month annualised growth rate in M4 excluding intermediate financial corporations was 9.2 per cent following a one per cent rise last month. This is above the 6-9 per cent range that governor Mervyn King has said the Bank was targeting.

However, lending to private non-financial companies fell for a second consecutive month in May, taking the annual decline to 4.3 per cent. Some of this weakness has been partly attributed to the fact that larger companies have been issuing new bonds and equity and using the proceeds to repay their bank debt, says Vicky Redwood at Capital Economics.

Lending to individuals was also disappointing. Bank of England data showed that 49,800 mortgages were approved last month, lower than the consensus estimate of 51,000. In cash terms, May saw £1.2bn of net mortgage funds advanced, which was a stronger outturn than the market had expected.

But Barclays Capital’s Simon Hughes pointed out that although this is an improvement from April’s £1bn outturn: “It compares with average monthly outturns of £8.5bn in the five years prior to the crisis and underscores how weak lending has been in spite of the recovery in house prices”.

May’s data also showed that a net £300m of unsecured funds was advanced to consumers during the month, slightly more than had been expected.