Bank of England gilt purchases have contributed to a significant pick-up in broad money growth but this has yet to be reflected in higher cash balances of non-financial corporations, according to May monetary statistics released today. However, corporate liquidity should improve as companies continue to take advantage of more favourable market conditions to issue new shares and bonds.
The Bank of England's monthly proxy for its favoured broad money measure – M4 excluding money holdings of financial intermediaries – rose by 0.2% in May after a 1.1% gain in April. Chain-linking the monthly proxy to "official" data showing a 1.5% rise in the first quarter, broad money has risen at a healthy 6.7% annualised rate so far in 2009.
Moreover, this understates liquidity growth because households and companies have increased their holdings of Treasury bills by £18 billion so far this year – equivalent to 1.2% of the Bank's broad money measure. In other words, a wider aggregate including Treasury bills has risen by over 9% annualised in the first five months.
As expected, the Bank's gilt purchases have been reflected initially in higher cash balances of financial institutions (i.e. excluding intermediaries). M4 holdings of households and private non-financial companies have risen at an annualised rate of 3.2% so far in 2009, well below the 6.7% increase in overall broad money. (Again, this understates liquidity growth because households and non-financial companies are likely to account for a significant portion of the rise in Treasury bills outstanding.)
Non-financial corporate M4 holdings have risen by just £1 billion, or 0.8% annualised, so far this year, despite sterling capital market issuance of £18 billion. This partly reflects a large-scale repayment of foreign currency borrowing in recent months. Assuming that this slows, corporate liquidity should improve as high financial sector cash balances facilitate further significant issuance. (The Bank's numbers imply that financial companies' M4 holdings – excluding intermediaries – have risen by about £25 billion so far in 2009, equivalent to annualised growth of more than 20%.)
The fall in monthly broad money growth from 1.1% in April to 0.2% in May is partly explained by a smaller boost from QE last month, with banks and building societies accounting for £8 billion of the £27 billion of gilts acquired by the Bank of England – see table. Bank purchases from the banking system have no impact on broad money unless banks use the cash released to increase private sector lending.
This QE "leakage", coupled with the lack of a recovery to date in non-financial companies' money balances, suggests that the Monetary Policy Committee will expand asset purchases by a further £25 billion to the £150 billion current maximum at its meeting next week, while simultaneously requesting Treasury authority for a higher limit.
| Change in gilt holdings £ billion | |||||||
| Jan-09 | Feb-09 | Mar-09 | Apr-09 | May-09 | |||
| Non-bank private sector | 4.2 | 0.7 | -5.9 | -2.9 | -6.2 | ||
| Overseas | -1.3 | 14.2 | -7.0 | -10.9 | -1.0 | ||
| Banks | 13.1 | 2.5 | -2.0 | 2.0 | -8.6 | ||
| Building societies | 0.0 | 0.7 | 0.2 | 1.0 | 0.7 | ||
| Bank of England | 0.7 | 0.5 | 15.3 | 28.8 | 26.8 | ||
| Total | 16.7 | 18.5 | 0.7 | 17.9 | 11.7 | ||
| DMO sales | 16.8 | 18.7 | 17.6 | 18.2 | 15.4 | ||
| Redemptions | 0.0 | 0.0 | 17.2 | 0.0 | 3.8 | ||
| Sales net of redemptions | 16.8 | 18.7 | 0.4 | 18.2 | 11.7 | ||