UK Money Supply data contradict the Bank of England Bank Rate cut

Yesterday saw a Deputy Governor of the Bank of England – at least for now as she is on her way out – toe the party line as we were told this by Dame Nemat Shafik.

the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

Actually it is perfectly reasonable to argue that all the monetary stimulus since the credit crunch has begun has harmed both reform and adjustment. Also more than a few people would point out that back in the day the starting point as described below was supposed to be an emergency response.

What is unusual about this particular loosening relative to previous cycles is its starting point. Despite many real economic variables having returned to around normal levels following the financial crisis the absence of any signs of overheating or inflationary pressure meant that at the time of the referendum Bank Rate was already at an all-time low of 0.5% and we held a stock of £375bn gilts on our balance sheet.

In the question and answer session following she repeated her view that more stimulus and rate cuts would be needed in spite of a confession that so far things had been better than she expected.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

Indeed she could not resist a really downbeat view which in the circumstances was none too bright.

Asked by Bloomberg Editor-in-Chief John Micklethwait if there was any positive impact from Brexit, Shafik paused. Her offering? The sunny summer enjoyed by Britain.

“The weather’s been really good since the referendum,” she told the audience at the Bloomberg Markets Most Influential Summit in London.

A problem for her view

As I pointed out the weekend before last on BBC Radio 4’s Money Box the simple fact is that the fall in the UK Pound £ is a much bigger factor for the UK economy than the Bank of England moves. As of the latest update on our effective or trade weighted exchange rate we have received the equivalent of a 2.5% cut in Bank Rate or as I put it on the radio a “Bazooka” compared to the “peashooter” she and her colleagues deployed with a 0.25% cut. The £60 billion of QE has pretty much been offset by a rise in pension fund deficits and the Corporate Bond QE seems to be as much for foreign firms as UK ones.

What about the money supply?

If we step back in time then UK monetary policy was once directed at growth in the money supply and in particular broad money. That had its issues as the measure used called £M3 was flawed ( for example it did not cover the building society sector which was becoming a larger player) and also because the causal relationship was between it and both economic growth and inflation. The mixture of the latter was variable but of course these days the Bank of England is trying to push both higher. So in this way we see that the modern measure of broad money is something it should be watching.

This morning we were updated on the state of play.

UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs). M4ex increased by £2.9 billion in August, compared to the average monthly increase of £14.1 billion over the previous six months. The three-month annualised and twelve-month growth rates were 10.9% and 7.3% respectively.

You may note that there was a slowing in August but you see in some ways it was a surprise it grew at all after the surge we saw in July.

M4ex increased by £25.4 billion in July,

I looked into the detail and noted that of this some £15 billion or so was moves in the financial sector such as insurance companies and pension funds. So would in reverse in August as we moved into calmer waters? On that road we might have seen a contraction this month and maybe a sizeable one but whilst the rise was small there was one.

Another way of looking at the data is to examine bank lending so here it is.

M4Lex is defined as M4 lending excluding intermediate OFCs. M4Lex increased by £5.0 billion in August, compared to the average monthly increase of £12.1 billion over the previous six months. The three-month annualised and twelve-month growth rates were 7.2% and 6.6% respectively.

This was slightly faster in size than in July and whilst the 3 month rate dipped the annual one edged higher.

Now if we take the official figures the UK is growing at an annual rate of maybe 2% and inflation is even on the RPI measure just below 2% so we have if we are being pretty generous 4% against money supply growth of 7.3% or bank lending growth of 6.6%. So those who use the broad money supply would not be pushing the monetary stimulus trigger. For those who think that growth is lower and follow the official inflation measure then their numbers may only add to 2% and old era theories of central bank behaviour would be considering a Bank Rate raise.

These are broad brush numbers but you get the idea. As the outlook is for them to provide an economic boost then further efforts if UK past history is any guide are likely only to push inflation higher.

Going Narrower

Today was not a day for the narrow money numbers but I did spot that a component of it is rising fast and after yesterday’s update on the war on cash it raised a wry smile. You see the retail deposits and cash component of M4 was rising at an annual rate of 7.1% in August as compared to 5.2% in January.

What about credit?

There was a time that numbers like these below would have the Bank of England going from yellow to red alert.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.


There is much to consider in the money supply data for the UK. There is always a caveat emptor with it as the effects from it can be long and variable and we have just had an economic change. However if you brought a Martian economist to Earth and asked he/she/it to offer a view in monetary policy they would be more likely to recommend a tightening than an easing. My view is that as the UK was already receiving a large boost from the lower level of the UK Pound it should have waited for more data.

Sadly central bankers these days suffer from a lot of control freakery along the lines of this from Biffy Clyro.

I gave birth to a fire
It’s like its features were burning
I’m in control
I am the son of God

In reality of course if they really had the power they claim we would not be where we are some 8/9 years into the credit crunch era. Still Dame Shafik was kind enough to confirm my “To Infinity! And Beyond!” theme. From @DeltaOne






19 thoughts on “UK Money Supply data contradict the Bank of England Bank Rate cut

  1. dunno Shaun , I am thinking Mr Carney’s rate cut and QE boost , small though it was ,

    was either to sabotage the economy after the Brexit vote


    the Brexit vote was grabbed as an excuse to help his Banking chums ( again )

    I predict that if DB slips under the waves or another Bank ( say Italian) barfs then we’ll see more
    QE and another cut …..

    money supply growth of 7.3% or bank lending growth of 6.6% and 2% inflation rate? I have worked mine to be approx 3.8% ( like your 4% generous rate ) and this is not regarded as
    dangerously inflationary ?

    apparently not – through the looking glass ……


  2. Hi Shaun,
    Very interesting, as always.
    I am not sure, however, that the BoE cares a hoot about money supply- in fact, it seems to have slipped out of mainstream economic discussion altogether.
    I would rank the concerns of the BoE as follows:
    1. Kicking the can down the road
    2. Making sure that we plebs don’t complain about their pensions, even though worth many times the pensions cap
    3. Leading a rather agreeable life and basking in a reputation for “saving the economy” twice (once after the crash and once after Brexit)
    I would say that the bank is wholly indifferent to:
    1. The long term consequences of their actions
    2. Any concept of reversing QE
    3. The travails of the savings industry and individual savers (“collateral damage”) and pensioners other than themselves
    4. What we do, think or say.
    Central bankers are life members of the groupthink club, which makes their crazy policies seem like orthodoxy!
    Rant over

    • I agree with Forbin. That isn’t a rant. CBs’ policies do look crazy. Shaun eloquently describes the craziness. But I don’t think these guys are stupid which leads me to conclude there is something they’re not telling us. It can only be the banks. I know they keep telling us that the banks are in better shape than in 2008, but a comparison with history is misleading. The financial and economic world is a different place today (just look at the volumes of debt and derivatives, for example). I don’t think they have a answer to the banking problems; I think they hope time (30+ years!) will help them get out of the mess- which is of course known as can kicking.

  3. Shaun,
    Thanks for bringing that M4 supply measure to the fore. It wasn’t long ago that this measure was important and it indicates a massive increase in credit, normally that would be a responsiblity of the BoE to control. Now obviously it is obscured by their massive market making activities which seem to be, keep pumping up assets or the world will end! Of course it will end, if shares drop 30% and house prices too, it will the end of credit, banking provision and any propsect of UK growth inside one or even two parliaments. Establishment and Political suicide to pull the punch bowl away from the party, however near the dawn of an unrealistic future that we reach.

    Brexit didn’t do it. I am now hoping on DB or Commerzbank to wreck the financial system and bring it to a reset.

    What surprised me was how many folk in the UK think this is normal, sensible and worth protecting, just go to the FT articles and read the respondents who thought staying in Europe was THE most important thing and every thing could be rosy of only we did.

    I forecast that this measure and all the other ones will pile-up, ooze through the floor and windows before MSM work it all out…

    Paul C.

    • Hi Paul C

      There was a good reason that people looked at broad money which was that it gave you information, just not as much as formal money supply control required. As you say it has dropped off the radar and one reason for it is that central banks are trying to drive it up via the QE style policies. The ECB pretty much admitted it in a recent monthly review when it said that narrow money was driving broad money growth ( and of course 1 trillion Euros + of QE has driven narrow money higher).

      As to the MSM they continue to plow a Brexit furrow some of them even ignoring the Deutsche Bank panic this evening.

  4. One of the unsung effects of low interest rates is its effects on repayments of mortgages – notably repayment mortgages in the near term. If the mortgage rate is reduced in response to lower general rates, we all know that monthly payments that borrowers make, goes down….BUT the amount of capital repaid within that monthly repayment actually goes up. This is a deflationary headwind that require banks to shovel even more new mortgage credit out of the door to new borrowers fuelling house price inflation both from a pull (the borrower with lower rates and increased ‘affordability’ – a key weapon in the war to secure a home) and this push (for the bank to maintain its book and profitability).

    I believe mortgage credit accounts for about 2/3 of the money supply, so you can see this deflationary effect is material yet you’ll never have heard it mentioned – due to a fundamental ignorance of what actually happens. Not least, it causes older, existing borrowers to pay their mortgages quickly off on the cheap, whilst new borrowers have to suffer higher prices – fuelling inequality and an inter generational divide.

    • Your argument assumes mortgagees keep their payments at the earlier higher rate instead of accepting the mortgagors recalculated lower monthly payment amount. That is a big assumption to make.

      • No. I assume the monthly repayment is reduced as would normally occur. It is a function of the capital and interest profile of repayments throughout a mortgage term.

        Your monthly payments start by paying a high level of interest and end with it being virtually all capital repayment. With higher rates (and higher monthly repayment amounts), you pay high % of interest for longer in those monthly amounts and end by paying big slugs of capital. With lower rates, the profile is shifted so that more capital is paid off up front and the capital payments at the end are smaller by virtue of the monthly repayment being smaller.

        Not many people know that.

        • Not many people know that because it’s flat wrong. I am one such person whom was hammered in the late 80’s/early 90’s with a 15% interest rate almost losing the house into the bargain. When rates began to fall my mortgagor reduced my monthly payment recalculated to maintain the original 25 year term, but I maintained my earlier payment amount on the grounds I’d been without the money any way.

          In doing this I repaid the mortgage in 17 years instead of 25. Had I accepted the reduced payments offered by my mortgagor the term of the mortgage would have remained at 25 years.

          If your argument is correct there should have been an immense deflationary effect in the 15 years following rate reductions in 1990/1992. In fact there was solid growth beginning in 1992 thru 2007. .

    • Between 1996 and 2008 house prices shot up about 10% PA. CPI failed to record this asset price inflation. The results are that houses cannot be bought for 3.5 times average income in many parts of the UK.

      Trying to do economic theory with UK inflation data since 1997 is garbage in, garbage out. We often slam banksters with accusations of fraud, larceny and subsidy abuse, but in the case of inflation recording and interest rate setting -> the BOE, the treasury and the then chancellor are responsible for the younger generation’s horrific financial position. Houses 8 times income or higher, 9 grand a year tuition fees and a growing national debt are indicators pointing toward impoverishment and possible social meltdown.

      • I don’t know if that was to hotairmail or me but if to me you have chosen the most inflationary period to prove your point. I feel it is better to look at all the information you can muster hence

        If you examine the House Prices percentage change chart (being mindful of your comments re CPI) chart you will see that they were in fact falling from 93 thry 94 but then began increasing from 95 to 96 before briefly falling again and then taking off in 97. The most extreme increases of 26% occurred in 2003 and 2004 before collapsing in 2009 thru 2011.with the most extreme falls of 17% being recorded in 2010.

        This demonstrates the highly volatile housing market of the UK which is not a straight line progression as many like to paint it. It is of couse open to you to dispute the numbers in the chart but I have chosen this chart in an effort to find evidence to support your 10% pa house inflation claims as it’s source is the Nationwide series which consistently produces the highest prices and house inflation over the lower Halifax and Land Registry numbers.

        I cannot agree that doing economic theory with UK inflation since 97 is GIGO as the ONS still maintains the RPI all items index including aspects of Housing costs like mortgage interest payments,council tax and building insurance amongst others. The numbers for this series are here:, and may be used as a deflator to the chart mentioned above.

        I fail to see the significance of 97 as a turning year for inflation measurement as RPIX (RPI with mortgage interest payments stripped out and therefore similar to CPI) was used as a deflator from 1992 – 2003 when it was replaced by the CPI measure.

        If you compare the historical RPI to RPIX you see that the variance is 1% to 2%

        Economic theory can still be done as the relevant indexes are still maintained and you may choose which series to use as your deflator. If you use RPIX then given the variance, UK GDP averages 1.5% pa which for one of the oldest advanced economies is good.

        Frankly,the RPI all items has it’s own shortcomings which I will not go into here.

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