M4 and M4 lending jumped sharply in June but the increases were largely due to “other financial corporations” (OFCs) and may reflect distortions caused by the Bank of England’s special liquidity scheme. Excluding OFCs, M4 rose by 6.4% in the year to June, the lowest annual growth rate since 2000 – see first chart.
Corporate liquidity trends are particularly concerning: M4 holdings of private non-financial corporations (PNFCs) fell for the fourth consecutive month, while their liquidity ratio (cash divided by bank borrowing) slumped to a new 17-year low, with negative implications for future business spending – see second chart.
This is not a time for hawkish heroics. The MPC should hold rates at next week’s meeting and be prepared to ease later in the year if these money trends continue.
