Is the MPC becoming concerned about "excess" liquidity?
Simon Ward
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Recent posts have argued that there is "excess" liquidity in the UK economy, helping to explain sterling weakness and rapid asset price gains. This excess is not captured by broad money statistics partly because it reflects a fall in the demand to hold money and partly because liquidity has been exported.
Today's MPC minutes are interesting because, for the first time, broad money trends are compared with nominal GDP (see paragraphs 11 and 23). To the extent that money demand moves in line with output (i.e. falling recently), the rate of change of the broad money to GDP ratio is a better guide to "excess" liquidity creation than money expansion itself.
This change of emphasis suggests that the MPC is unlikely to expand gilt purchases next month on the basis that broad money growth remains low. Instead, the decision will hinge on the medium-term inflation forecast generated for the November Inflation Report.
The two-year-ahead projection based on unchanged policies was above 2% and rising in the August Report. Since then, output news has been consistent with the August forecast (according to today's minutes), actual inflation has been higher than expected, sterling has weakened and equity, property and commodity prices have strengthened. The presumption must be that the inflation forecast is unlikely to be revised lower, implying no case for a further extension of gilt-buying.
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