UK monetary conditions were starting to improve even before the MPC embarked on “quantitative easing”, according to Bank of England data for February released today. Economic news is likely to remain grim for most of 2009 but the monetary foundations are being laid for a 2010 recovery.
Key features of today’s data include:
- Broad money M4, excluding holdings of financial corporations, grew by an annual 3.0% in February, up from 2.9% in January. This conceals a big rise, of 2.4% or 10.0% annualised, in the latest three months – see first chart.
- M4 holdings of non-financial corporations jumped by 5.3%, or 23.0% annualised, in the three months to February. Corporate money holdings are still down 2.1% from a year before but this compares with a 5.9% decline in November. The recovery is greater in real terms and suggests less pressure for retrenchment – second chart.
- Bank lending to non-financial corporations has also recovered, rising 1.6% in January / February combined. The larger rise in money holdings, however, has pushed the corporate liquidity ratio (money holdings divided by bank borrowing) up to its highest level since May 2008.
- Narrow money is weaker than broad money, with M1 – currency in circulation and overnight / sight deposits – up by just 0.3% in the year to February. The rise over the last three months, however, was 2.2% or 9.1% annualised.
- “Underfunding” has contributed to the recent pick-up in broad money – “sterling net lending to the public sector” accounted for 1.0 percentage points of the increase in M4 in January and February combined. This reflects purchases of gilts and Treasury bills by commercial banks, motivated partly by regulatory pressure to boost liquidity reserves. With QE kicking in, underfunding will rise further.
