The dramatic negative shift in the economic outlook resulting from the post-Lehman freezing of money and credit markets is confirmed by detailed monetary statistics for September released today.
Forget the headline annual increases of 12.4% and 14.2% in broad money M4 and bank lending (excluding securitisations) - these have been hopelessly distorted by a rerouting of interbank business through non-bank financial intermediaries. For a truer read, look at M4 and lending excluding "other financial corporations" (OFCs). Annual increases in these measures dropped to 5.0% and 6.8% respectively in September - the lowest since 1999/2000.
It gets worse. In the last three months, M4 and lending ex OFCs grew at annualised rates of just 2.8% and 2.3% - see charts.
The non-OFC private sector comprises households and non-financial corporations. Companies are under severe financial pressure. Their M4 holdings dropped again in September and are down 3.8% over the last year - the largest annual fall since 1980. Meanwhile, their access to credit has been curtailed at a time when working capital needs are likely to have been boosted by the economic downturn. Outstanding bank credit contracted in the three months to September.
Narrow money developments are equally concerning. M1, comprising currency in circulation and instant-access deposits, rose by just 0.1% in the year to September - the lowest annual increase since 1969. Real M1 contracted by 4.7%, the largest fall since 1980.
With the September figures unlikely to capture the full impact of the freeze, monetary trends clearly warrant a large cut in Bank rate next week. My MPC-ometer continues to project a reduction of 75-100 basis points, with a full-point move likely if three-month LIBOR is above 5.75% at the time of the meeting.
