Broad liquidity holdings of UK households and non-financial firms are growing at the fastest pace since the 2008-09 recession, supporting optimism about economic prospects and strengthening the case for an early interest rate rise.
The Bank of England’s preferred broad money aggregate, M4 excluding money holdings of “intermediate other financial corporations” (M4ex), rose by an annual 3.9% in August, in line with the average since the start of 2014 – see first chart. Its growth, however, has been depressed by two factors unlikely to be of economic significance. First, money holdings of financial corporations have fallen by 4.3% over the past year, cutting M4ex growth by an arithmetical 0.6 percentage points. This reflects a decline in bank deposits held by fund managers* and securities dealers, and has little implication for spending in the economy.**
This suggests focusing on M4 holdings of households and non-financial firms, or “non-financial M4”, rather than M4ex. Annual growth of non-financial M4 was 5.3% in August, the fastest since July 2013 – first chart.
Secondly, the annual rise in household M4 has been lowered by large-scale switching into National Savings products. The 12-month inflow to NS was a record £21.8 billion in August, mainly reflecting heavy buying of high-interest pensioner bonds on offer from January until one week after the May general election. Such bonds, and other NS products, would be included in M4 if issued by a bank rather than the government. This argues for adding together non-financial M4 and outstanding NS when judging the broad liquidity position of households and non-financial firms. This expanded measure grew by an annual 6.3% in August, the fastest since June 2008 and well above an average of 3.7% over 2010-14 – first chart.
The positive message from broad liquidity is reinforced by still-solid narrow money trends. Non-financial M1, comprising notes / coin and sight deposits of households and non-financial firms, grew by an annual 7.6% in August – second chart.
Bank credit expansion is lagging money growth – the usual cyclical pattern – but is firming, with forward-looking indicators positive. M4 lending to households and non-financial firms rose by an annual 1.9% in August, the fastest since May 2009 – second chart. Mortgage approvals totalled £19.6 billion in August, the highest since April 2008. Excluding remortgages, approvals were £12.9 billion, almost matching a peak of £13.0 billion in January 2014 associated with a rush to beat new tougher mortgage rules. Meanwhile, sterling unused credit facilities – another leading indicator – grew by an annual 4.1% in August, with a notable pick-up in recent months***.
*Insurance companies / pension funds, investment / unit trusts and other fund managers.
**The fall may also be of limited significance for asset prices, since it may have been offset by a rise in financial institutions’ holdings of other liquid assets: the outstanding stock of DMO repos and Treasury bills increased substantially in the year to August.
***16.1% annualised rise over latest three months.
