Growth in M4 excluding "intermediate other financial corporations" – the best measure of the broad money supply, also referred to as "adjusted M4" – rose slightly during the first quarter but remains below a level likely to be consistent with trend economic expansion and on-target inflation over the medium term. The latest figures probably influenced the MPC's decision this week to expand QE.

Annual growth in adjusted M4 edged up from 3.5% in December to 3.9% in March – see first chart. The recovery is more impressive in real terms: deflated by retail price inflation, the annual change has moved up from a low of -0.7% in September to 4.3% in March. This supports expectations that the economy will stabilise during the second half.

Adjusted M4, however, probably needs to grow by 6-7% per annum over the medium term to be consistent with the inflation target. This assumes potential GDP growth of 2% and a decline in velocity of 2.5% pa, in line with the mean over 1992-2004, when inflation averaged close to 2%. Faster expansion than 6-7% is arguably warranted shorter term to support additional economic growth to close the current large output gap.

During the first quarter alone, adjusted M4 grew at a 5.4% annualised pace. This is higher than a 4.0% increase in M4 excluding all financial corporations (i.e. M4 held by households and non-financial corporations). The difference may partly reflect a boost to money holdings of financial institutions (i.e. excluding intermediate OFCs) from the Bank's QE gilt purchases in March. Detailed figures show significant rises in M4 deposits of securities dealers and investment / unit trusts during the first quarter, partly offset by a fall in insurance companies' and pension funds' cash.

Credit expansion is weaker than monetary growth. The annual increase in M4 lending excluding intermediate OFCs (and adjusted for the effect of securitisations) slid further to 2.8% in March from 4.6% in December, although the quarterly change recovered from -2.0% annualised to 2.3%. A key reason for expanding QE is to prevent the slowdown in credit from pulling down monetary growth.

It is difficult to disentangle demand and supply effects on credit weakness. One indication of supply restriction, however, is that credit utilisation rates (i.e. the proportion of arranged facilities actually drawn down) rose further in most industries during the first quarter – second and third charts. Banks are honouring existing lending agreements but appear reluctant to sanction an expansion of credit lines.