March monetary statistics look consistent with an ongoing economic recovery:
- M4 excluding money holdings of non-bank financial intermediaries rose by 1.1% from February and by 5.9% annualised over the last three months. This confounds the Cassandras who claimed that broad money would contract if the Bank stopped buying gilts.
- M4 ex. is still only 1.2% higher than a year ago but this is unlikely to signal insufficient liquidity to support economic growth because the demand to hold bank deposits has fallen in response to negative post-tax real deposit rates. Consistent with a portfolio shift away from money, retail sales of unit trusts and OEICs totalled a record £27.2 billion in the year to March – equivalent to 2.7% of household M4 and up from £7.9 billion in the previous 12 months.
- Importantly, available liquidity continues to flow to the corporate sector, supporting hopes of a post-election pick-up in investment and hiring. M4 holdings of private non-financial corporations rose by 0.5% in March for an annual gain of 4.0%. With companies also adding to foreign-currency deposits while continuing to repay bank debt, the liquidity ratio is at its highest level since September 2007 – see chart.
- Narrow money M1 is still growing solidly – by 5.9% in the year to March.
- Mortgage approvals remain weak – 49,000 in March versus a peak of 57,000 last October – but housing market activity has probably been depressed by the election. A net 40% of banks reported expectations of stronger demand for mortgages for house purchase over the next three months in the April credit conditions survey.
Today's statistics also reveal that foreign investors were heavy buyers of gilts and Treasury bills in February and March, probably reflecting capital flight from Greece and other peripheral Eurozone economies. Net purchases were a record £27.6 billion for the two months – greater than the £23.8 billion inflow in all of 2009.
