The Bank of England's favoured broad money measure – M4 excluding deposits held by non-bank financial intermediaries – continued to strengthen in May, arguing against an extension of official gilt-buying. Broad money has surged at a 9.2% annualised rate over the last three months.
Sectoral detail shows that recent growth has been focused on financial institutions – M4 held by households and non-financial corporations rose by 1.5% annualised in the three months to May. Financial money, however, is likely to be transferred to other sectors (e.g. to non-financial firms via purchases of new issues of equities and bonds).
The broad money pick-up is encouraging but narrow money, M1, has recently been a better guide to economic prospects. M1 contracted as the economy entered recession in mid 2008 but recovered strongly in mid 2009, presaging GDP expansion late last year – see first chart. Annual growth has stabilised, consistent with a continuing economic upswing.
The corporate liquidity ratio (i.e. non-financial firms' sterling and foreign currency deposits divided by their bank borrowing) is little changed since March but remains well above its early 2009 low, supporting hopes of a revival in business investment and hiring – second chart.
In terms of the "credit counterparts" arithmetic, the pick-up in the Bank's M4 measure since gilt-buying ended in January mainly reflects a larger offsetting swing in "sterling net non-deposit liabilities". Banks, in other words, had been funding assets through capital issues and longer-term borrowing but have switched to deposit financing more recently.
Reflecting capital flight from the Eurozone, foreign purchases of gilts and Treasury bills were again strong in May at a combined £7.1 billion, though down from £14.9 billion and £18.7 billion respectively in April and March.
