Weak second-quarter monetary data contributed to the MPC's decision last month to embark on an additional £50 billion of gilt purchases. July statistics released today are more encouraging, supporting recovery hopes and reducing the chances of further QE expansion.
Key points:
1. The MPC's favoured broad money measure – M4 excluding money holdings of "intermediate other financial corporations" – rose by a respectable 0.6% in July while first-half growth has been revised up from 3.5% annualised to 4.4%. Broad money increased by 4.9% annualised in the first seven months of 2009.
2. The Bank of England estimates that broad money rose by an annual 3.9% in July, which compares with a 1.2% gain in the retail prices index excluding mortgage interest costs. Implied real growth of an annual 2.6% contrasts with a contraction of 1.1% in Sepember last year and is higher than at the start of the economic recovery in the early 1990s.
3. M4 holdings of private non-financial corporations rose by 0.2% in the year to July – the first annual increase since March 2008. M4 lending to such corporations continued to contract in July, falling 2.9% from a year earlier. However, this partly reflects companies choosing to use the proceeds of recent capital issues to repay bank borrowing.
4. Historically, business spending has been positively correlated with the corporate "liquidity ratio" – M4 holdings divided by lending. Reflecting recent debt repayment, the ratio has recovered to its highest level since March last year. A wider definition including foreign currency deposits and loans has risen by more – see first chart.
5. Credit demand needs to revive to support M4 expansion when QE ends. Excluding remortgaging, mortgage approvals rose by 6% in July to stand 37% higher than a year earlier, suggesting a pick-up in mortgage lending later in 2009 – second chart.
