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JULY 29, 2010, 8:55 A.M. ET.2nd UPDATE: UK Money Growth Weak, M4 Lending Lowest On Record
By Natasha Brereton
Of DOW JONES NEWSWIRES
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LONDON (Dow Jones)--The Bank of England's preferred measure of broad money supply marked a slower pace of growth in June, while M4 lending logged its weakest annual rate on record, underscoring the challenges facing the U.K. economy.
The softer tone of the data support analysts' expectations that the central bank will maintain its extremely loose policy stance for some months to come, and make no change at its meeting Aug. 5.
Figures released by the BOE Thursday showed money supply, excluding financial institutions whose activities distort underlying trends, edged up 0.2% in June after a 0.9% increase in May. In three-month annualized terms, money supply expanded 6.0%, also slower than the previous month, when the measure rose 8.9%.
Broad money lending, meanwhile, contracted 0.3% on the month after a 0.2% decline in May. In annual terms, money lending fell 0.2%, after rising 0.5% a month earlier, and marking the weakest rate since records began in the fourth quarter of 1998.
While the figures are volatile, "this will no doubt support the Monetary Policy Committee's suspicions that the recent pick-up has been largely due to a shift in seasonal variations," said Vicky Redwood, senior U.K. economist at Capital Economics.
The minutes of the MPC's July meeting noted that movements in the deposits of financial corporations, including insurance companies and pension funds, may be distorting the figures. As a result, the Bank is reviewing its seasonal adjustment method.
The BOE has highlighted growth in broad money supply--which historically has expanded by around 6% to 9% on the year--as a key indicator of the effectiveness of its GBP200 billion quantitative-easing policy of buying bonds with freshly created central-bank money.
The MPC suspended its bond purchases in February, but has left the door firmly open to extending the program should conditions deteriorate. It has also kept its key interest rate at an all-time low of 0.5% for 17 straight months.
While inflation is now expected to remain above its 2.0% target for the rest of the year, BOE Governor Mervyn King told lawmakers Wednesday that the continued weakness of broad money supply growth suggests that inflationary pressures aren't building.
He stressed that the central bank needed to keep monetary policy extremely loose to support the recovery, and said that while the MPC could decide to increase stimulus further or raise interest rates slightly in coming months, it wasn't about "applying the brakes."
The BOE is in the process of reviewing its forecasts ahead of its quarterly Inflation Report next month.
M4 lending to households was stable in June, rising 0.1% on the month and 1.3% on the year, matching May's figures.
Lending to corporates picked up slightly in monthly terms, declining 0.4% after May's 0.6% fall.
But its annual drop of 4.4% was worse than a 4.3% decrease in May, and marked the joint weakest rate since the central bank started collecting data in the second quarter of 1964.
Some analysts suggested the implications of the corporate lending data may be less negative than they appear, noting that the pace of contraction in loans to firms seemed to accelerate in recent months, at a time when investment spending was starting to recover.
"Our suspicion is that much of the weakness on this side of the lending data is about demand rather than supply: firms are able to finance higher investment spending out of their cash flow, retained earnings, or with finance provided by non-banks," said Malcolm Barr, economist at JPMorgan Chase Bank.
The softer tone of the data support analysts' expectations that the central bank will maintain its extremely loose policy stance for some months to come, and make no change at its meeting Aug. 5.
Figures released by the BOE Thursday showed money supply, excluding financial institutions whose activities distort underlying trends, edged up 0.2% in June after a 0.9% increase in May. In three-month annualized terms, money supply expanded 6.0%, also slower than the previous month, when the measure rose 8.9%.
Broad money lending, meanwhile, contracted 0.3% on the month after a 0.2% decline in May. In annual terms, money lending fell 0.2%, after rising 0.5% a month earlier, and marking the weakest rate since records began in the fourth quarter of 1998.
While the figures are volatile, "this will no doubt support the Monetary Policy Committee's suspicions that the recent pick-up has been largely due to a shift in seasonal variations," said Vicky Redwood, senior U.K. economist at Capital Economics.
The minutes of the MPC's July meeting noted that movements in the deposits of financial corporations, including insurance companies and pension funds, may be distorting the figures. As a result, the Bank is reviewing its seasonal adjustment method.
The BOE has highlighted growth in broad money supply--which historically has expanded by around 6% to 9% on the year--as a key indicator of the effectiveness of its GBP200 billion quantitative-easing policy of buying bonds with freshly created central-bank money.
The MPC suspended its bond purchases in February, but has left the door firmly open to extending the program should conditions deteriorate. It has also kept its key interest rate at an all-time low of 0.5% for 17 straight months.
While inflation is now expected to remain above its 2.0% target for the rest of the year, BOE Governor Mervyn King told lawmakers Wednesday that the continued weakness of broad money supply growth suggests that inflationary pressures aren't building.
He stressed that the central bank needed to keep monetary policy extremely loose to support the recovery, and said that while the MPC could decide to increase stimulus further or raise interest rates slightly in coming months, it wasn't about "applying the brakes."
The BOE is in the process of reviewing its forecasts ahead of its quarterly Inflation Report next month.
M4 lending to households was stable in June, rising 0.1% on the month and 1.3% on the year, matching May's figures.
Lending to corporates picked up slightly in monthly terms, declining 0.4% after May's 0.6% fall.
But its annual drop of 4.4% was worse than a 4.3% decrease in May, and marked the joint weakest rate since the central bank started collecting data in the second quarter of 1964.
Some analysts suggested the implications of the corporate lending data may be less negative than they appear, noting that the pace of contraction in loans to firms seemed to accelerate in recent months, at a time when investment spending was starting to recover.
"Our suspicion is that much of the weakness on this side of the lending data is about demand rather than supply: firms are able to finance higher investment spending out of their cash flow, retained earnings, or with finance provided by non-banks," said Malcolm Barr, economist at JPMorgan Chase Bank.
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