The Bank of England's favoured broad money measure – M4 excluding money holdings of "intermediate other financial corporations" (i.e. companies classified as non-banks that act as a conduit for interbank business) – contracted by 0.7% in October following a 0.8% September decline. This suggests a serious monetary deficiency that threatens to abort an economic recovery.
On closer examination, however, these falls are entirely explained by a large drop in M4 held by other financial corporations (OFCs) not classified as "intermediate". By contrast, the combined money holdings of households and non-financial corporations – i.e. M4 excluding all OFCs – rose by 0.3% and 0.2% respectively in September and October, with annual growth reaching an eight-month high of 2.9%. This suggests that liquidity created by official gilt-buying is filtering down to "end-users" responsible for spending decisions.
The large fall in money holdings of "non-intermediate" OFCs, moreover, appears to be an artefact of the Bank of England's seasonal adjustment procedure. This grouping includes insurance companies and pension funds, investment and unit trusts, other fund managers and securities dealers. M4 holdings contracted by a seasonally-adjusted £29 billion, or 9%, in September and October (see Bankstats table A2.2.3, T6, column 4). Yet non-seasonally-adjusted figures show a decline of only £5 billion (derived by summing changes for the listed industries in table C1.1, T95-96). The £24 billion discrepancy accounts for the entire decline in M4 excluding intermediate OFCs in September and October.
An alternative approach is to use the non-seasonally-adjusted money holdings of "non-intermediate" OFCs when calculating the M4 measure. This is defensible on two grounds: it is unclear why these holdings should exhibit a seasonal pattern and there is insufficient history to estimate reliable monthly seasonal factors. On this basis, M4 excluding intermediate OFCs rose by 0.3% in October after a 0.2% September drop. While still weak, this is probably consistent with economic growth since the demand to hold broad money has been depressed by low deposit rates and reviving risk appetite.
Other features of the October monetary data support optimism about economic prospects. Narrow money M1 has accelerated strongly, rising at a 16% annualised rate over the last three months – see chart. Meanwhile, there were further rises in October in the corporate liquidity ratio (i.e. non-financial companies' sterling and foreign currency money holdings divided by their bank borrowing) and mortgage approvals for house purchase, to their highest levels since September 2007 and March 2008 respectively.
