The Bank of England's favoured broad money measure – M4 excluding money holdings of non-bank financial intermediaries – rose by 0.3% in February, defying expectations of weakness following the cessation of the Bank's gilt-buying in January.

Within overall broad money, M4 holdings of private non-financial corporations rose by 0.5%, pushing three-month growth up to an annualised 4.6%. Companies also increased their foreign currency deposits while continuing to repay bank borrowing, resulting in a further rise in the liquidity ratio to its highest level since June 2007 – see chart. Corporate M4 and the liquidity ratio are better leading indicators of the economy than aggregate broad money.

Corporate credit contraction reflects demand weakness much more than inadequate supply – retained earnings are running well ahead of capital spending so firms must either increase their holdings of financial assets or repay debt. Credit demand should revive as investment and hiring recover. The decline in "sterling unused credit facilities" slowed to an annual 8.7% in February versus a peak of 19.5% last April.

While corporate money is picking up, financial institutions' M4 holdings – excluding intermediaries – fell again in February and have declined by 20% annualised over the last three months. Lower cash levels imply less "fuel" to propel asset prices higher, consistent with other evidence of a deteriorating liquidity backdrop for markets.

The rise in aggregate broad money in February reflected a strong positive influence from external and foreign currency flows, according to the Bank's "credit counterparts" analysis. The "externals" were heavily negative during 2009 as a portion of the liquidity created by the Bank's gilt purchases flowed overseas. This effect may now be reversing.