Money supply growth still disappointing

WEAK growth in the broad money supply in September has raised further questions over the effectiveness of the Bank of England&rsquo;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 &ndash; taking the annual growth to 11.6 per cent. However, M4 excluding non-bank financial intermediaries such as clearing houses, the Bank&rsquo;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&rsquo;s Simon Ward said that the data looked better on closer inspection. <br /><br />He said: &ldquo;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 &pound;10bn last quarter, presumably reflecting increased confidence in financial market prospects.&rdquo;<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 &pound;17.6bn in the third quarter, the weakest on record. Last month lending to manufacturing firms fell by &pound;1.8bn, with the annualised quarterly growth rate falling by 40.6 per cent. <br /><br />Citi&rsquo;s Michael Saunders said: &ldquo;The continued weakness of core M4 and of funds raised by UK corporates probably will ?&ndash; to the MPC &ndash; be taken as arguments in favour of extending QE. But, the weakness in money and credit &ndash; despite six months of colossal QE &ndash; also highlight the limitations of QE as a tool to revive the economy.&rdquo;<br /><br />He added that while UK banks remain impaired, QE was unlikely to provide effective stimulus.