Broad money figures for March show a disappointing initial impact from QE. It is too early to make a firm judgement but the numbers suggest that Bank of England asset purchases will need to be expanded beyond the planned £75 billion by early June to boost monetary growth sufficiently to support a sustained economic recovery. (The Bank has Treasury authority to buy up to £150 billion.)

Monetary trends are best monitored using the Bank of England’s adjusted M4 measure excluding “intermediate other financial corporations” – this removes distortions due to the financial crisis but includes investing institutions’ money holdings, which should be inflated by a successful QE operation. The Bank of England does not release its monthly adjusted M4 estimates but the aggregate is likely to have been little changed in March, since overall M4 rose by only 0.2% on the month, while M4 excluding all financial corporations declined by 0.1%. (The Bank will publish March quarterly data for its adjusted M4 and M4 lending measures on 8 May.)

The Bank of England bought £15 billion of gilts in March, equivalent to 0.9% of adjusted M4. There are two possible reasons why the money numbers have shown little response. First, the Bank may have bought securities mainly from banks and overseas investors rather than domestic non-bank investors – only money holdings of the latter are included in M4. Secondly, a positive impact from QE may have been offset by other influences on M4, such as weak bank lending to the private sector.

Both factors were in play in March. Statistics on gilt transactions by sector show that Bank purchases of £15 billion were balanced by net sales of £7 billion by overseas investors, £6 billion by domestic non-banks and £2 billion by banks – see table. So the direct impact of purchases on M4 was only 40% (i.e. £6 billion out of £15 billion). (The outstanding stock of gilts was little changed in March, with DMO issuance offset by a large redemption. This may have affected the sectoral pattern of transactions.)

Meanwhile, credit weakness was a significant drag on M4: sterling bank lending to households and non-financial corporations, adjusted for securitisations, rose by only 0.2% in March and there was a large repayment of net foreign currency borrowing by UK residents. In addition, while domestic non-bank investors reduced their gilt holdings by £6 billion, they bought £21 billion of other forms of public sector debt, including £10 billion of Treasury bills. The overall public sector contribution to monetary growth – including the impact of the public sector net cash requirement, the Bank’s purchases and other debt transactions – was therefore only £6 billion, or 0.4% of adjusted M4.

While this month’s numbers are disappointing, money trends have improved significantly since last autumn: M4 excluding financial corporations rose at a 4.0% annualised pace in the three months to March after just 0.8% during the the fourth quarter. Annual growth slipped to 2.5% in March but in real terms – relative to retail price inflation – has recovered from a low of -0.6% in October to 2.9% now. This is consistent with improving economic prospects but a further pick-up is needed to lay the monetary foundations for a recovery.

The MPC is likely to wait until its June meeting before deciding to expand its QE operation, partly because it would be unwise to make a judgement about its impact on the basis of just one month’s data, and partly because an expansion of the programme would probably take the form of an extension of buying for a further three months, rather than a step-up in the weekly pace of purchases.