Monetary statistics for June are encouraging for economic prospects in three respects. First, the broad money supply (i.e. M4 holdings of households, private non-financial corporations and financial corporations excluding intermediaries) followed up solid gains in recent months with a further 0.2% increase. While annual growth remains low at 1.2%, broad money rose at a healthy 5.2% annualised rate during the first half of the year.

Secondly, narrow money M1 – on the ECB's definition comprising currency in circulation and overnight deposits – increased by 1.5%, pushing annual growth up to a 26-month high of 8.3%. Hardly anybody bothers to monitor M1 these days but it has proved a better leading indicator than broad money, contracting as the economy entered a recession in spring 2008 but recovering strongly in mid 2009 ahead of a GDP rebound later last year – see first chart.

Thirdly, the corporate liquidity ratio – non-financial corporations' sterling and foreign currency deposits divided by their bank borrowing – rose again during the second quarter, continuing a recovery from a low in the first quarter of 2009, two quarters before the trough in GDP. Excluding the struggling real estate sector, the liquidity ratio is now at the top of its historical range – second chart.

Pessimists will focus on continued weakness of bank lending to the private sector, which contracted at a 1.0% rate during the first half. Last week's news, however, that non-oil GDP rose by 2.0% in the year to the second quarter is convincing refutation of the "creditist" view embraced by many economists and journalists last year that no economic recovery would occur without a revival in lending.

Private sector lending matters more because of its implications for money creation than its direct impact on the economy. Recent lending weakness and the decision to suspend official gilt purchases in February will not prevent a continuing economic recovery because other factors have boosted broad money expansion. Specifically, banks have stepped up purchases of public sector securities (to £23.9 billion during the first half from £10.7 billion in the second half of 2009), there has been a net influx of capital to the UK (resulting in a positive contribution to monetary growth from "external and foreign currency flows"), while banks have slowed capital-raising, relying more on deposits to fund assets (reducing the negative contribution from "net non-deposit sterling liabilities").