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Money supply starts to feel effects of QE

THE Bank of England received some welcome news today after its preferred measure of broad money supply finally showed strong growth.

M4X, which excludes activity between intermediate financial institutions, grew at a three-month annualised rate of 6.6 per cent in April.

This is a pace not seen since before the collapse of Bear Stearns and is just within the six to nine per cent range that Bank governor Mervyn King has previously said the central bank is targeting.

Importantly, the gap left by the Bank of England after it ended its schedule of asset purchases is being filled, at least partially, by bank and building societies. These institutions purchased £6.3bn of gilts in April and £13.5bn in the last three months.

But analysts warned that the breakdown does not suggest as robust growth as the M4X numbers might point to.

Simon Ward, chief economist at Henderson, said: “The sectoral breakdown is less encouraging, showing money holdings of non-financial corporations falling over the last three months.”

However, he adds: “The corporate liquidity ratio, nevertheless, has recovered significantly since early 2009, supporting expectations of a revival in business investment and hiring.”

Lombard Street Research’s Jamie Dannhauser agreed: “Whichever way you cut the cake, overall liquidity conditions have clearly improved since the turn of the year.”

Henderson’s Ward also said: “M4 lending to households remains sluggish while non-financial corporations continue to repay bank borrowing, reflecting their strong net free cash flow surplus. Weakness in credit demand, however, could be starting to abate – the stock of unused facilities granted by banks rose slightly in the three months to April.”