Key UK money supply measures were unchanged in July but have grown at a faster pace since early 2010, supporting hopes of a continued economic recovery. Corporate liquidity, in particular, has improved further. Unusually, households failed to expand their money holdings last month, probably reflecting a combination of low interest credited, an ongoing switch into mutual funds and use of spare cash to repay borrowing.
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Broad money (i.e. M4 holdings of households, private non-financial corporations and financial corporations excluding intermediaries) stagnated in July but has still grown at solid annualised rates of 5.6% and 5.9% over the last three and six months respectively.
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Narrow money M1, comprising currency and overnight deposits, was also unchanged but has grown by 8.3% annualised over the last three months and by 7.6% over the last year. M1 is universally ignored by economists but is usually a better leading indicator than broad money: it contracted as the economy entered a recession but recovered strongly in mid 2009 ahead of the current GDP upswing – see first chart.
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Within broad money, non-financial companies' holdings rose by 0.9% in July, pushing annual growth up to 4.0%. Excluding the troubled real estate sector, the corporate liquidity ratio (i.e. bank deposits divided by bank borrowing) is at the top of its historical range, suggesting a continued recovery in business spending – second chart.
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Very unusually, households' broad money holdings were unchanged in July – the only previous month since 1997 when they failed to expand was October 2008, when financial stability concerns led to a flood of cash out of banks and building societies into Treasury bills, gilts and national savings instruments. (Monthly statistics begin in 1997; quarterly figures going back to 1963 have never recorded a fall.) There has been no such "safe-haven" flow recently but households have been switching into mutual funds, net retail sales of which totalled £2.1 billion in June (July figures are due next week). In addition, interest credited to accounts has slumped in line with deposit rates, while higher lending / deposit spreads may be encouraging some borrowers to use any spare cash to repay debt.
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There was broad demand for gilts in July, with banks, foreign investors and private non-banks buying respectively £4.8 billion, £5.6 billion and £6.7 billion. Banks have increased their holdings by £25.7 billion since "QE" was suspended in January.
