WEAK growth in the broad money supply in September has raised further questions over the effectiveness of the Bank of England’s quantitative easing (QE) policy and raised the likelihood that the central bank may extend the programme further when it meets next week.<br /><br />Headline M4, the measure for money supply, grew by 0.8 per cent in September – taking the annual growth to 11.6 per cent. However, M4 excluding non-bank financial intermediaries such as clearing houses, the Bank’s preferred measure, fell 0.9 per cent, taking the annual drop to 1.7 per cent.<br /><br />But while the figures appeared weak, Henderson New Star’s Simon Ward said that the data looked better on closer inspection. <br /><br />He said: “The quarterly decline was entirely due to non-intermediate financial corporations running down their money balances. Insurance companies, pension funds, trusts and other fund managers reduced their M4 holdings by £10bn last quarter, presumably reflecting increased confidence in financial market prospects.”<br /><br />But net lending to non-financial firms also remained in negative territory in September. The three-month annualised growth rate of lending to the non-financial sector was in negative territory for the fifth month in a row, edging up only marginally to -0.9 per cent. <br /><br />Furthermore, net funds raised by UK non-financial companies via bank loans and capital issues totalled £17.6bn in the third quarter, the weakest on record. Last month lending to manufacturing firms fell by £1.8bn, with the annualised quarterly growth rate falling by 40.6 per cent. <br /><br />Citi’s Michael Saunders said: “The continued weakness of core M4 and of funds raised by UK corporates probably will ?– to the MPC – be taken as arguments in favour of extending QE. But, the weakness in money and credit – despite six months of colossal QE – also highlight the limitations of QE as a tool to revive the economy.”<br /><br />He added that while UK banks remain impaired, QE was unlikely to provide effective stimulus.