Talk about selective use of statistics. Bank of England Governor Mervyn King has defended the decision to launch QE2 on the grounds that “the amount of money in the economy fell over the last year”. He is referring, presumably, to the 0.6% decline in the M4 broad money measure in the year to August.

However, the Bank’s own monetary analysis, presented in the Inflation Report and updated in the monthly minutes, is based on the “M4ex” measure, which strips out deposits of financial intermediaries. The exclusion is justified because the money holdings of such institutions are unrelated to economic transactions. M4ex rose by 2.2% in the year to August.

M4ex, however, understates available liquidity because it excludes foreign currency holdings and public sector money substitutes. Foreign currency deposits rose by 7.0% in the year to August, perhaps reflecting money-holders diversifying away from sterling as the MPC effectively abandoned its inflation target.
 
The Governor should stop pretending that the MPC is concerned about monetary weakness. QE2 has been launched in response to double dip fears and as a quid pro quo for the coalition sticking to its deficit-cutting plans. The MPC has demonstrated no ability to forecast inflation so its claim that action was required to prevent an undershoot should be treated as propaganda.

Rules-based policy-making has been replaced by 1970s-style discretionary fine-tuning driven largely by political considerations – a recipe for continued sterling weakness and stagflationary malaise.