Growth in the Bank of England's favoured broad money measure accelerated to an annualised 4.9% in the three months to January – above a level likely to be consistent with achievement of the 2% inflation target over the medium term.

The Bank's Governor, Mervyn King, has repeatedly cited sluggish broad money growth as a reason for nonchalance about the current inflation overshoot. This ignored the possibility that the velocity of circulation of money would rise in response to the negative real interest rates imposed by the Bank – an increase in velocity has the same economic impact as monetary expansion. Velocity has indeed picked up, climbing 2.1% during 2010 – the largest annual rise since 1979.

The February Inflation Report addressed the velocity issue for the first time (see box on p.17), conceding that under current circumstances a given rate of broad money growth could be associated with a faster increase in nominal GDP. Achievement of the inflation target requires nominal GDP to expand by 4.5-5% per annum (assuming a trend real growth rate of 2-2.5%), so this suggests maximum allowable broad money expansion of about 4%. Absent evidence of a slowdown in the recent velocity increase, it would be safer to aim for a lower number.

As well as weakening a key argument of rate rise opponents, faster broad money expansion supports the view that fourth-quarter GDP weakness was erratic and the economy will grow solidly during the first half of 2011. Also encouraging is a strong reacceleration of the narrow measure "non-interest-bearing M1" (comprising currency and traditional current accounts), which often leads domestic spending. NIB M1 surged by 31% annualised in the three months to January.

The pick-up in broad money has been driven by bank lending to the public rather than private sector – banks bought £10.2 billion of gilts in January and £21.6 billion in the latest three months, adding 5.6% to annualised broad money growth. Bank purchases compensated for foreign gilt sales of £1.5 billion in January – the largest outflow since April 2009.