The Bank of England's favoured broad money measure – M4 excluding money holdings of "intermediate other financial corporations" – grew at an annualised rate of only 3.7% during the second quarter despite a large positive impact from official gilt purchases. Coupled with a significant downward revision to the first-quarter rate of increase, from 6.2% annualised to 3.3%, the latest figures imply that monetary trends are less favourable for economic prospects than seemed the case a month ago, on the basis of data up to May.

While today's report is disappointing, the 3.5% annualised growth rate of the M4 measure during the first half is slightly higher than a 2.7% increase in the second half of 2008. Moreover, a broader liquidity measure including Treasury bills and repo borrowing by the Debt Management Office (a close substitute for bank repos included in M4) has risen by 5.2% annualised so far this year. The large first-quarter revision, coupled with the high volatility of its monthly estimates, suggest that the Bank is still refining its approach to measuring the new aggregate, implying the possibility of further adjustments.

M4 growth remained sluggish during the second quarter because the positive impact of QE was offset by a rise in banks' "net non-deposit sterling liabilities" and, to a lesser extent, a reduction in their net external and foreign currency lending. The increase in non-deposit liabilities partly reflects banks' efforts to rebuild capital by retaining profits and issuing long-term debt and equity. However, both of these monetary counterparts show considerable volatility and the negative second-quarter effect may well reverse during the second half.

In assessing the economic implications, it is important to focus on real rather than nominal money supply trends. The annual rate of change of real M4 – relative to the retail prices index – has recovered from a low of -0.7% in the third quarter of 2008 to 4.7% by the second quarter, supporting expectations of economic improvement during the second half. With RPI inflation on course to rebound sharply in 2010, however, nominal money expansion will need to accelerate significantly over the remainder of 2009 to sustain real growth at its current rate.

The Bank's gilt-buying will have further lagged positive effects on monetary trends during the second half but today's figures suggest that the MPC should extend asset purchases by at least the further £25 billion currently mandated at its meeting on Thursday. Until broad money growth revives convincingly, there remains a risk that a near-term economic recovery will give way to renewed weakness in 2010-11.