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Pressure Grows On Bank As Money Supply Falls

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yawn yawn.

time and more time. that is your only commodity in life that you can sell and this is going to take a lot of it. :(

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Pressure on the Bank of England's rate-setting committee to extend its scheme of quantitative easing (QE), or creating new money, mounted today as it emerged that a key measure of money supply in the economy fell to its lowest rate in a decade.

The gauge of M4 money, which excludes certain parts of the financial sector and is closely watched by the Bank as an indication of whether quantitative easing is working, rose by 3.1 per cent in the second quarter between April and June, down from growth of 3.8 per cent in the first three months of the year. It was the lowest rate of quarterly growth since 1999.

On an annual basis, the measure rose from 3.35 per cent in the first quarter to 3.7 per cent, despite the fact that the Bank of England has pumped £125 billion of newly created money directly into the economy.

The Bank of England's own figures also showed that lending to businesses tumbled by a record £14.7 billion between April and June.

That explains why the banks are putting out spin stories as to why they aren't lending to business.

At least we've got green shoots, just think how dire it would be if we hadn't.

Is this also a spin exercise to pave the way for more QE from the BoE?

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Predicting the Bank of England’s decisions is never straightforward - particularly these days. Indeed, ahead of the Monetary Policy Committee’s decision on Thursday there is a split among economists over what the MPC will do.

A growing number now think the MPC will leave its Quantitative Easing programme unchanged. I have to say I suspect otherwise. It will be a close decision, and clearly it could go either way, but I feel the Bank has little option other than to extend the programme, raising the amount it will buy in bonds from the market from £125bn to at least £150bn.

This might seem counter-intuitive - after all many of the recent stats on the economy have been a little better than expected (notwithstanding last month’s rather shocking GDP figures for the second quarter). But the fact is that should the MPC decide to freeze the QE programme this week, it may serve as an embarrassing admission that it has failed rather dismally. It will appear tantamount to abandoning it - and my hunch is that is an impression the Bank will want to avoid giving at all costs.

Earlier today, the Bank released its definitive measure of the growth of the money supply (pdf link)in the second quarter of the year. This is the clearest and most reliable bellwether yet of how successful the programme, which started in March, has been so far (for those who read my blog on this subject last week, the difference between those figures and today’s is largely that today’s are rather more reliable).

And the news is rather disappointing. You would expect the levels of money in the economy to be growing pretty quickly, at the very least because of the large injection from the Bank of England itself. In fact, the Bank’s favoured broad money measure – M4 excluding money holdings of “intermediate other financial corporations†– grew by only 3.7pc during the second quarter. It also downwardly revised the first quarter’s rate of increase from an annualised rate of 6.2pc to 3.3pc.

The rate of growth of money in the UK feeds into the speed at which the economy grows, and the Bank wants money to be growing at around 5pc a year, in order to keep the economy ticking along at a sufficient rate.

But the injection of around £125bn of cash ought in itself to have boosted money growth by around 7pc, so clearly some of the money is getting “lostâ€, absorbed by banks in the face of the financial crisis.

The figures don’t in themselves prove that QE has been unsuccessful. It is impossible to know the counterfactual. There is every chance the recession would have been far more painful and stubborn had the Bank not taken this action. Moreover, QE helped push sterling lower (which in turn has helped exports and manufacturing) and may have pushed more investors into equity prices, which have staged a remarkable rally in recent months.

But the fact that we have not yet had solid evidence of QE’s success in the money numbers leads me to suspect that the Bank will not want to call a halt to this one yet. Most economists agree that one of the biggest mistakes the Bank of Japan made in the 1990s was to halt its initial experiment with QE too early.

There are legitimate worries about what this injection of newly-printed money will do to inflation in the medium and long term. But if there’s one thing today’s money figures don’t hint at, it’s inflation.

As such, I think that the Bank will plug on with its programme - if not at this week’s meeting then perhaps next week in the Inflation Report. After all, there are a few simple rules to QE (if you can call them rules given they exist mainly in theory), and the first is as follows: make sure the market is in no doubt that you will spend as much as is necessary to make the project work. I suspect we’re not quite there yet.

It appears that we will get more QE? The experiment to continue?

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