By Agency Reporter

Monday, 1 Nov 2010

The Bank of England‘s preferred measure of broad money supply picked up in September, but remained well below its long-term trend, highlighting the continuing hurdles to recovery in the United Kingdom economy.

Analysts said although unexpectedly strong UK Gross Domestic Product figures have reduced the chances of any immediate additional stimulus by the central bank, Friday‘s data point to the possibility of more action down the line, reported by Wall Street Journal from London on Friday.

”There is still little evidence of the pick-up in money and lending growth that the Monetary Policy Committee is hoping for,” Vicky Redwood, senior UK economist at Capital Economics, said.

”Even though the committee is likely to hold fire at next week‘s meeting, more quantitative easing is probably not too far off.”

The figures released by the BOE on Friday showed that broad money supply, excluding financial institutions whose activities distorted underlying trends, rose by 2.6 per cent in annualised terms in the third quarter, following a 0.5 per cent gain in the second quarter.

M4 lifted two per cent in the July-September period compared with the third quarter of 2009, after a 1.1 per cent increase the previous quarter.

While those numbers show a modest improvement, they remain well below the six per cent to nine per cent historical year-on-year rates of expansion that broad money supply was marking up pre-crisis.

The MPC has highlighted growth in broad money as a key indicator of the effectiveness of its GBP200 billion quantitative easing policy of buying UK government bonds with freshly created central bank money.

The policy was suspended in February, but the bank has left open the possibility of extending it if conditions deteriorate.

At the MPC‘s October meeting, member Adam Posen voted for further purchases, while Andrew Sentance again called for a modest rise in interest rates, and the majority opted for no change.

The MPC would hold its next regular monthly meeting between November 3 and 4, ahead of the release of its new quarterly forecasts for inflation and output growth. While economists broadly predict no change in the policy stance next week, a growing number expect the BOE to expand its quantitative easing program early next year.

Based on the old measurement technique, broad money supply shrank by 0.7 per cent on the month in September, lifted by 0.3 per cent in three-month annualised terms and rose by two per cent on the year.

The acceleration in broad money supply growth in the third quarter reflected a 2.4 per cent annualised rise in household sector M4, up from a 0.7 per cent gain the previous quarter, and a 10.3 per cent increase in corporate sector M4, compensating for a 0.5 per cent drop in the second quarter.

Source: Punch