2nd December 2015 by Simon Ward
Key UK money and credit measures continued to grow solidly in October, sending a positive message for economic prospects and supporting the case for an early rate rise.
The Bank of England’s broad money measure, M4ex, rose by 0.4% in October, pushing annual growth up to 4.5%, the fastest since January – see first chart.
The rate of increase of M4ex has been restrained recently by 1) a fall in financial sector deposits, which probably has little relevance for economic prospects, and 2) a switch of household deposits into National Savings (NS), which are not included in M4ex. A better guide to the availability of liquidity to finance private sector spending is the sum of M4 money held by households and private non-financial corporations (PNFCs) – i.e. “non-financial M4” – and outstanding NS. This increased by 0.6% in October, pushing annual growth up to 6.4%, the fastest since May 2008 – first chart.
The velocity of circulation of this measure has been broadly stable in recent years – see previous post. If velocity were to continue to move sideways, sustained 6% plus growth would be reflected, in time, in an equal rate of increase of national income. This, in turn, would imply inflation of 3.5% plus, assuming 2.5% trend output expansion. The MPC is unconcerned about, or oblivious to, this risk, judging from recent communications*.
The rise in broad money growth has been concentrated in the corporate sector, with annual growth of PNFC M4 rising to 12.7% in October, the fastest since June 2007.
Narrow money continues to expand more strongly than the broader aggregates. Non-financial M1 (i.e. currency in circulation and sight deposits of households and PNFCs) rose by 0.9% in October, lifting annual growth to 7.4%. This is, however, well down from a peak of 12.0% reached in October 2013.
Credit expansion is gathering pace, with the annual increase in M4ex lending up to 3.3% in October, the fastest since April 2009. Non-financial lending growth (i.e. to households and PNFCs) is lower, at 2.6%, although such lending has risen more strongly recently – at an annualised rate of 3.8% in the latest three months.
Of the various measures, real (i.e. inflation-adjusted) non-financial M1 has the best record as a leading indicator of the economy, accelerating before rises in GDP growth and contracting before recessions – second chart. Its six-month rate of increase has been little changed over the past year, consistent with GDP continuing to expand by about 2.5% per annum. Recent stronger broad money growth, however, suggests upside risk to this forecast.
*The word “money” did not appear in either the November or August Inflation Reports.