Britain’s broad money supply has stopped growing for the first time in at least 13 years, a reading that will deepen concerns among monetarists urging the Bank of England to show restraint in its battle against inflation.
(Bloomberg) — Britain’s broad money supply has stopped growing for the first time in at least 13 years, a reading that will deepen concerns among monetarists urging the Bank of England to show restraint in its battle against inflation.
Economists who predicted the surge in inflation during the pandemic after seeing money-supply growth rocket are now worried that the UK is in danger of recession and deflation.
Bank of England data on Wednesday showed that M4 excluding intermediate other financial corporations — a closely watched measure of money supply — was no higher in July than a year earlier.
Monetarists argue that the surge in money supply in 2020 and 2021, fueled by interest-rate cuts and quantitative easing to support the economy, helped to cause the jump in inflation — claims disputed by the BOE.
The pace of money growth has since tumbled, a warning sign to some economists such as Simon Ward, economic adviser to Janus Henderson, and Tim Congdon, founder of the Institute of International Monetary Research and a former adviser to Margaret Thatcher.
King Warning
Former BOE Governor Mervyn King has also warned rate-setters against ignoring money-supply signals.
July marked the first time there has been no growth in the monthly money supply data since at least 2010. Money supply has also always been positive in quarterly data going back to 1998. In addition, the headline M4 measure for July signaled the biggest contraction in money supply since 2015.
The BOE has been attacked over its handling of inflation in the UK, with critics claiming it was too slow to respond to price pressures. Earlier this year, BOE Deputy Governor Ben Broadbent contested the monetarist claim that bond purchases under QE drove inflation higher.
The central bank has continued to raise borrowing costs in response to sticky price and wage data, though markets are betting on the BOE nearing an end to its rate rises.
King warned in an interview with Bloomberg last month that the central bank’s rate-setters were ignoring warning signs in money data.
“The risk is that having ignored money when inflation was rising, they’re now ignoring money when inflation is actually about to fall,” he said. “If they carry on for the next six months or so, tightening monetary policy, it could well be that they generate both a recession as well as a sharp fall in inflation.”
–With assistance from Andrew Atkinson.
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