November monetary statistics are consistent with an ongoing economic recovery. Corporate liquidity and mortgage approvals for house purchase continue to strengthen while narrow money is growing solidly. Broad money remains weak but this is of limited concern currently because low interest rates and reviving risk appetite have depressed the demand to hold money by households and financial institutions.
- Broad money (M4) holdings of private non-financial corporations (PNFCs) rose by 4.8% in the year to November – the fastest annual growth rate since February 2008. Real corporate money expansion is a leading indicator of business investment and hiring – see chart. Bank lending to PNFCs is down by 2.2% over the last year but rose in November, suggesting that credit demand is stabilising as the economy recovers.
- Household M4 growth slowed further to an annual 2.4% in November but this is likely to reflect a voluntary shift of funds into other savings vehicles. Mutual fund inflows probably remained strong in November – figures are released tomorrow – while National Savings attracted a bumper £2.8 billion, mostly into now-withdrawn "guaranteed growth bonds" offering a premium interest rate.
- The number of mortgage approvals for house purchase rose by a further 5% in November for a 123% annual gain. The housing recovery is focused on more expensive homes – the average value of morgages approved increased an annual 16% in November.
- Narrow money M1 rose by 12% annualised in the three months to November. A shift of cash into more liquid forms often precedes a rise in spending or financial investment; expressed differently, the M1 pick-up is consistent with an increase in the velocity of circulation of broad money.
- The Bank of England's preferred broad money aggregate – M4 excluding money holdings of "intermediate other financial corporations" – surged by 0.9% in November following declines of 0.6% and 0.9% in October and September. As explained last month, the volatility largely reflects the Bank's seasonal adjustment procedure for money holdings of "non-intermediate" financial firms.
- A sustained contraction in broad money would be concerning but recent weakness is explicable by portfolio shifts and has not prevented a recovery in corporate liquidity. Firmer credit trends should support M4 in early 2010 – banks expect stronger demand for business loans, house-purchase mortgages and unsecured consumer lending, according to last week's Credit Conditions Survey.
