The “credit counterparts” arithmetic shows how changes in the broad money supply, M4, are related to other components of the banking system’s balance sheet, including lending to the private and public sectors. Public sector lending – also termed the “public sector contribution” – has been much larger than the rise in M4 since March 2009, reflecting the Bank of England’s gilt-buying. This has led some commentators to claim that broad money will plunge if the purchase programme is stopped.

Such analysis, however, ignores important interactions between the credit counterparts. Official gilt-buying, while inflating public sector lending in recent months, has had simultaneous negative effects on other counterparts. The net boost to M4 has probably been modest, arguing against a significant negative impact from a suspension of purchases. With the demand to hold money depressed by negative real deposit rates, there should be sufficient monetary fuel to support an ongoing economic recovery.

The Bank’s gilt purchases can result in a negative impact on other credit counterparts in the following ways:

• An overseas investor selling to the Bank may hold the proceeds on deposit at a UK bank or use them to repay borrowing. This is recorded as a negative flow under “external and foreign currency counterparts”.

• A UK non-bank seller of gilts may repay bank borrowing or buy goods or assets from another UK resident who then repays debt. Bank lending to the private sector is correspondingly reduced.

• Alternatively, the non-bank seller may invest in newly-issued bank bonds or equities, resulting in a negative impact under “net non-deposit liabilities”.

• Official gilt purchases financed by the Bank creating reserves may cause banks to buy fewer gilts, since reserves are a close substitute. The rise in the public sector contribution is then smaller than the official purchases.

A reversal of the last effect may be particularly important in limiting any negative impact on M4 from a suspension of the Bank’s operations. Banks bought £26 billion of gilts between November 2008 and January 2009 but their holdings have risen by just £1 billion since the Bank announced its purchase scheme last February. A return to the earlier pace of accumulation would substitute for official buying on the recent scale.