UK money supply figures for December are a mixed bag, suggesting moderate economic expansion during the first half of 2011.

Encouragingly, corporate liquidity has improved further, with non-financial corporations' sterling and foreign currency deposits rising at a 4.3% annualised rate in the three months to December. Echoing business surveys, strength was focused on the manufacturing sector, with a stunning 22.1% rise, while deposits of companies in the services sector slipped by 1.4%.

With companies continuing to repay debt, the liquidity ratio (i.e. bank deposits divided by bank borrowing) reached its highest level since the second quarter of 2007. Excluding the overleveraged commercial property sector, the ratio is at a new high in data extending back to 1998 – see chart. The liquidity ratio leads business investment, which rose by 8.9% in the year to the third quarter.

Broad money rose by 3.0% annualised in the three months to December while annual growth moved up to 2.3%. As previously argued, a 2-3% rate of increase may be more than sufficient to support trend economic expansion and 2% inflation because the velocity of circulation is rising in response to negative real interest rates. Some MPC members seem to be placing less weight on low broad money expansion as a factor restraining inflation, with the January minutes stating that "money and credit growth could remain weaker than nominal spending growth for some while".

There are two concerns. First, narrow money remains sluggish – M1, on the ECB's definition (i.e. currency plus overnight deposits), rose by only 1.3% in the 12 months to December, unchanged from November but down from 5.0% in December 2009. A further fall would be alarming. Secondly, high inflation is acting as a drag on economic prospects by weakening real-terms monetary trends. This, however, argues for the MPC to press ahead with policy tightening to prevent the current inflation overshoot from becoming entrenched.