Yesterday’s Bank of England news release states that “the Committee will monitor the effectiveness of this purchase programme in boosting the supply of money and credit”. However, the MPC needs to clarify which monetary measures it is monitoring and how big a boost it is aiming to achieve.

Headline M4 and M4 lending numbers are unusable at present, having been inflated by an explosion in money holdings and bank borrowing of “intermediate other financial corporations”. This reflects the replacement of traditional unsecured interbank borrowing and lending by secured forms of lending channelled through off-balance-sheet entities and third parties such as the London Clearing House.

The MPC will probably focus on the Bank of England’s adjusted M4 and lending measures, which exclude these financial intermediaries. Annual growth rates are published quarterly in a chart in the Inflation Report, with underlying data provided in a spreadsheet. Adjusted M4 rose by an annual 3.8% in December versus 16.1% for headline M4; the corresponding numbers for adjusted and headline M4 lending were 3.8% and 15.9%. Bank statisticians also calculate monthly estimates for the MPC meetings but these are not currently published (I have submitted a request for access under freedom of information provisions).

While it is not possible to derive the Bank of England’s adjusted measures from published data, monthly figures can be calculated for M4 and lending excluding all financial corporations, i.e. covering only households and non-financial companies. The latest annual growth rates, for January, were 2.8% and 4.9% respectively. Asset purchases, however, will boost the money holdings of traditional financial institutions – insurance companies, pension funds, unit and investment trusts etc. – in the first instance so the omission of the financial sector is a major disadvantage for monitoring the progress of the scheme.

A previous post argued that the MPC should aim to deliver a five percentage point boost to the annual growth rate of adjusted M4, i.e. from 3.8% to about 9%. The announced programme looks consistent with this target but the MPC should be prepared to adjust operations – in either direction – in light of incoming monetary data.