Foreign investors continued to buy gilts and Treasury bills on a large scale in April, probably reflecting a flight of capital from the Eurozone as its sovereign debt crisis reached a crescendo. Gilt and bill purchases were £13.1 billion and £1.3 billion respectively versus £14.2 billion and £4.4 billion in March. Total buying was a record £42.1 billion in the three months to April – almost sufficient to finance a public sector net cash requirement of £42.6 billion.
Other features of the April monetary data include:
- Broad money, M4, rose by a further 0.3%, pushing three-month annualised growth up to 6.6% versus just 0.2% in January. This acceleration defies pessimists who claimed that M4 would contract when the Bank of England stopped gilt purchases. (M4 here refers to the Bank's preferred measure excluding money holdings of non-bank financial intermediaries.)
- Banks and building societies have partially compensated for the end of official buying, purchasing £6.3 billion of gilts in April and £13.5 billion in the latest three months.
- While the M4 pick-up is welcome, the sectoral breakdown is less encouraging, showing money holdings of non-financial corporations falling over the last three months. The corporate liquidity ratio, nevertheless, has recovered significantly since early 2009, supporting expectations of a revival in business investment and hiring – second chart.
- Narrow money trends, also, are slightly disappointing, with M1 expansion slowing to 2.7% annualised in the latest three months. Annual growth of 4.8% is much lower than in the Eurozone – 10.7%.
- M4 lending to households remains sluggish while non-financial corporations continue to repay bank borrowing, reflecting their strong net free cash flow surplus. Weakness in credit demand, however, could be starting to abate – the stock of unused facilities granted by banks rose slightly in the three months to April.
Monetary trends, overall, remain consistent with solid economic growth and may not prevent a continued inflation overshoot – the non-inflationary rate of broad money expansion has probably fallen well below historical norms as the demand to hold money has been depressed by negative real interest rates.
