UK narrow money growth slowed in July while broad money growth was little changed: monetary trends, overall, appear consistent with continued solid economic expansion through early 2015.
The preferred narrow and broad aggregates here are M1 and M4 excluding financial sector deposits, which are volatile and contain less information about near-term economic prospects. Six-month growth of real non-financial M1 fell to 3.3% (not annualised) in July, the lowest since March 2013 but still strong by historical standards. Six-month real non-financial M4 expansion was 1.4%, equal to its average over the past year – see first chart.
The decline in narrow money growth in July reflected a large movement of funds out of household sight deposits into cash ISAs to take advantage of an increased annual investment allowance of £15,000. These funds would normally have been invested over April-June, suggesting that M1 expansion was inflated in these months, i.e. the July reading represents a return to trend.
The “big picture” is that real narrow money growth rose substantially in 2011-13 ahead of 2013-14 economic strength and remains at an expansionary level despite recent moderation. Stable real broad money growth supports the view that there has been no material change in the monetary environment.
The August MPC minutes cited solid expansion of corporate broad money holdings as a reason for optimism about business investment. This was sustained in July, with a six-month increase in real M4 held by private non-financial corporations (PNFCs) of 3.4% – second chart.
Banks are continuing to widen their interest margin on household sector business, according to interest rate data released with the monetary statistics. The average rate paid on household deposits fell by a further 2 basis points to 1.14%, while the average lending rate was unchanged at 3.93%*. The lending / deposit rate spread, therefore, rose to 2.79%, the highest since August 2010 – third chart.
*Lending / deposit rates on outstanding stocks estimated from interest rate / volume data for different types of business.
