UK monetary statistics for October suggest that widespread gloom about economic prospects is overdone.
Broad money, on the preferred M4ex measure, rose by a respectable £8.5 billion or 0.5% in October, partly reflecting Bank of England gilt purchases of £16.9 billion. This builds on an acceleration occurring before the launch of QE2: six-month growth has firmed to an annualised 4.5% with the year-on-year increase up to 2.8% – the highest since June 2009.
A broader liquidity aggregate including private sector holdings of Treasury Bills, National Savings instruments, DMO repos and foreign currency deposits at UK banks is growing more strongly than M4ex – an annual 4.1% in October.
Corporate liquidity is improving: M4 holdings of private non-financial corporations rose by an annualised 9.0% in the latest three months.
Better nominal monetary trends combined with slowing inflation will lead to a significant acceleration in real money expansion by early 2012, boosting growth later next year. The view here is that an inflation squeeze on real money was a major reason for this year’s economic weakness.
The Bank essentially monetized the budget deficit in October – bond purchases of £16.9 billion compared with DMO net issuance of £17.0 billion. Capital flight from the Eurozone continued to boost the gilt market, with overseas investors buying £12.5 billion – an 18-month high. Banks, meanwhile, purchased by £2.7 billion, with the non-bank private sector acting as “seller of last resort”, reducing holdings by £16.7 billion.