There is no compelling monetary case for launching QE2, based on July money supply statistics released today.
The Bank of England’s favoured broad money measure, M4 excluding “intermediate other financial corporations”, or M4ex, rose by 0.6% last month, pushing annual growth up to 2.2% – the fastest since December and up from 0.9% a year before.
The annual increase of 2.2% remains low by historical standards – M4ex grew by 6.3% annualised over 1998-2003, before the credit bubble developed. The velocity of circulation, however, has been rising recently, in contrast to a fall over 1998-2003, so slow monetary expansion has not prevented solid growth in nominal GDP – by 8.9% between the second quarter of 2009 and the first quarter of 2011, or 5.0% annualised.
Put differently, 2.2% M4ex growth may be consistent with or even too high for achievement of the 2% inflation target, at least until the Bank raises interest rates, thereby making bank deposits more attractive and slowing the rise in velocity.
M4ex, in any case, may understate liquidity expansion. A broader measure also including Treasury bills, National Savings instruments, DMO repos and foreign currency bank deposits (again excluding intermediate OFCs) grew by an annual 4.5% in July – see chart.
Elsewhere in today’s statistics, foreign purchases of gilts slumped to £440 million in July, the weakest result since March. This suggests that the UK is no longer being viewed as a “safe haven” by investors moving money out of the Eurozone – foreign gilt purchases surged ahead of last year’s first Greek rescue and again ahead of the Irish bailout.
