As reported in today’s FT, British Bankers’ Association (BBA) figures for May show a £200 million fall in sterling lending to private non-financial companies. The report states that “a key objective of the Bank of England’s “quantitative easing” programme ... is to encourage more private sector lending”, suggesting that the Bank will be disappointed by the BBA news.

Three points are worth noting. First, a £200 million decline is insignificant, amounting to 0.07% of outstanding BBA member lending to private non-financial companies. Moreover, the BBA statistics cover only 65% of total loans by UK-based banks to non-financial firms, according to Bank of England data. The flow of total lending exceeded the BBA flow by an average of £500 million per month over the six months to April. (The Bank will publish its May data on 29 June.)

Secondly, the key objective of QE is to boost the money supply not lending, although credit trends should revive if the policy succeeds in generating an economic recovery. The Bank of England’s website explanation of QE places money rather than credit at the centre of the transmission mechanism:

Asset purchases increase the supply of money directly into the wider economy which should boost spending. ... The seller of an asset to the Bank can spend the new money it receives on goods and services which directly adds to overall spending or it can purchase other assets which will tend to boost asset prices more broadly and provide an indirect spur to spending.

Thirdly, to monitor the impact of QE, the MPC has stated that it will pay close attention to “the growth rate of broad money, the cost and availability of corporate borrowing, measures of inflation and inflation expectations, and developments in nominal spending growth”. The list does not include the volume of bank lending to companies, because the MPC recognises that lending weakness may reflect demand factors rather than supply constraints – including firms choosing to raise funds from markets rather than the banks.

The MPC will be encouraged by recent faster money growth, higher corporate equity and bond issuance and signs of a stabilisation in inflation expectations and nominal spending. In assessing the extent of improvement in the “cost and availability of corporate borrowing”, the Committee is likely to place high weight on its second-quarter Credit Conditions Survey, released on 2 July.