Most commentators appear to have missed the big story in yesterday's monetary data – the 1.0% rise in the Bank of England's adjusted M4 proxy in April (see previous post). Reports focused instead on the 0.1% monthly contraction in bank lending to households and non-financial corporations. According to the consensus, the lending decline is evidence of a continuing credit crunch and signals further economic weakness.

Three points are worth emphasising. First, empirical analysis shows that money leads the economy whereas credit lags. This is why the US Conference Board includes the real M2 money supply in its index of leading indicators, while real commercial and industrial loans and the ratio of consumer credit to personal disposable income are components of its lagging index.

Secondly, credit trends are nonetheless important to the extent that they influence monetary growth. The MPC, however, has correctly chosen to offset the monetary impact of credit weakness by buying gilts. This policy should and presumably will continue until credit growth revives and resumes its normal role as key driver of monetary expansion.

Thirdly, it is impossible to disentangle supply and demand effects on credit trends. Recent weakness may have been demand-led, reflecting a reduced need for working capital as stocks are run down together with companies taking advantage of more favourable market conditions to float new issues, using the proceeds to repay bank debt.

The adjusted M4 proxy is volatile and it would be unwise to read too much into a single month's increase. The MPC, however, should be reassured by the faster pace of growth so far this year, suggesting that a decision about expanding the QE programme further will be deferred until next month's meeting.