The recent sell-off in gilts would have been more severe but for heavy buying by banks and building societies, according to November monetary statistics released today.

Banks and building societies bought £10.0 billion of gilts in November, the largest amount since January 2009. The purchases offset sales of £5.7 billion by domestic non-bank investors, while overseas buying slowed to £3.3 billion, the smallest since June.

Despite the November fall, overseas investors have absorbed £50.6 billion of net gilt issuance of £107.8 billion in the first eight months of 2010-11, or 47%. With foreign demand probably now waning, further strong banking-sector buying is likely to be needed to avert a rise in gilt yields.

Large-scale November purchases may have partly reflected banks' surprise that the MPC failed to copy the Federal Reserve by launching QE2 that month. This would have boosted their cash reserves at the Bank of England, allowing them to meet their objective of raising liquid asset holdings without buying more gilts.

Monetary news within today's release was mixed, suggesting a slowdown in economic growth during the first half of 2011. The Bank's preferred broad money aggregate, M4ex, rose at a faster 3.5% annualised rate in the three months to November but has been boosted by a probably-temporary rise in securities dealers' deposits. Money holdings of private non-financial corporations fell over the latest three months, reducing annual growth to 2.6% from 5.1% in September. Narrow money, M1, also contracted, echoing weakness in the Eurozone.

A key concern is the squeeze on real money supply trends from rising inflation, with the CPI headline rate on course to exceed 4% in early 2011. The demand to hold money may simultaneously decline as real deposit interest rates fall deeper into negative territory but the net effect may be to constrain the economic recovery.

The inflation squeeze would be less intense had the MPC raised rates last summer; this would have boosted sterling, restraining import cost increases, while firing a shot across the bows of firms planning price hikes. Policy tightening is now urgently required; medium-term growth prospects will be much worse if the current inflation overshoot becomes entrenched.