The "best" measure of the UK broad money supply – M4 excluding money holdings of financial intermediaries – grew by 1.0% in April, according to a monthly proxy made available by the Bank of England today. Chain-linking this increase to "official" first-quarter numbers, adjusted M4 is estimated to have risen at a 7.8% annualised rate in the first four months of 2009, up from 3.0% during the second half of 2008. This suggests that QE is working and supports economic recovery hopes.
The 1.0% rise in the adjusted measure in April compares with an increase of just 0.1% in M4 holdings of households and non-financial corporations. The big gap implies that cash balances of financial institutions, excluding intermediaries, rose strongly, probably reflecting the direct and indirect impact of Bank of England asset purchases. Reinvestment of this cash should boost asset prices and money holdings of corporations, as institutions subscribe for new equity and bond issues.
The April broad money rise would have been larger but for a contraction of 0.1% in bank and building society lending to households and non-financial corporations – the first monthly fall since 1993. Lending to households slowed to £2.2 billion, the lowest since August, while corporations repaid £4.7 billion of bank debt, partly out of the proceeds of recent capital issues (sterling issuance totalled £13.7 billion in the three months to April).
Bank of England gilt purchases of £29 billion in April offset £18 billion of DMO (Debt Management Office) issuance, reducing the market-held stock by £11 billion. Sectoral figures show that gilt holdings of overseas and UK non-bank investors fell by £11 billion and £3 billion respectively, while banks and building societies bought £3 billion – see table.
When the Bank buys from a UK non-bank investor, M4 rises as the investor's bank account is credited; there is no such first-round effect with a purchase from a foreign investor, since overseas deposits are excluded from M4. Foreigners, however, appear to have used cash from gilt sales to buy assets from UK institutions and subscribe to new issues, thereby boosting M4 and allowing UK companies to repay bank debt.
Annual growth in adjusted M4 appears to have remained stable at 4.2% in April, since there was an identical 1.0% monthly rise in April 2008. In real terms, i.e. relative to retail prices, the annual rate of change has recovered from a low of -0.7% in September last year to 5.5%. Narrow money trends have also improved, with the annual change in real M1 – currency and sight deposits – up from -5.8% in October to 1.4% in April.
| Change in gilt holdings £ billion | ||||||
| Jan-09 | Feb-09 | Mar-09 | Apr-09 | |||
| Non-bank private sector | 4.2 | 0.7 | -5.9 | -2.9 | ||
| Overseas | -1.2 | 14.2 | -7.0 | -10.9 | ||
| Banks | 13.1 | 2.5 | -2.0 | 2.0 | ||
| Building societies | 0.0 | 0.7 | 0.2 | 1.0 | ||
| Bank of England | 0.7 | 0.5 | 15.3 | 28.8 | ||
| Total | 16.8 | 18.5 | 0.7 | 17.9 | ||
| DMO sales | 16.8 | 18.7 | 17.6 | 18.2 | ||
| Redemptions | 0.0 | 0.0 | 17.2 | 0.0 | ||
| Sales net of redemptions | 16.8 | 18.7 | 0.4 | 18.2 | ||