Broad money was weak in August. A 0.4 percent monthly contraction reversed only half of the previous period's unrevised bounce but that followed a 0.5 percent drop in June and annual M4 growth fell from 0.6 percent in July to just minus 0.1 percent. M4 lending was down 0.2 percent on the month and now stands 0.3 percent below its level in August 2014, its twenty-third consecutive yearly decline.
Excluding intermediate other financial corporations the picture was little better. Hence, adjusted M4 dipped 0.1 percent versus July and annual growth slowed from 4.2 percent to 3.9 percent. On the same basis, adjusted M4 lending was up 0.1 percent and 2.3 percent respectively, the latter a tick weaker than at the start of the quarter.
However, if headline money supply remains decidedly sluggish, the housing market showed fresh signs of accelerating activity. Hence, mortgage approvals rose nearly 3 percent on the month to 71,030, their highest level since January last year and significantly above the 65,000/month fourth quarter prediction made in the BoE's August Inflation Report. Once again record low levels of mortgage rates (3.06 percent in August) seem to be providing a solid boost to demand.
Accordingly, while the overall financial data appear to be in line with some cooling in economic activity, the housing market, which just a few months ago looked to have run out of steam, could yet become a key factor supporting any calls from the MPC's hawks (currently, just McCafferty) for an immediate hike in Bank Rate.
M4 is the main broad measure of money supply in the UK. The central bank's preferred measure excludes economically irrelevant financial transactions.
M4 is similar to the M3 measure used in some other countries. M4 includes everything in M2 (also called the retail component of M4) plus other deposits with an original maturity of up to five years; other claims on financial institutions such as repos and bank acceptances; debt instruments issued by financial institutions including commercial paper and bonds with a maturity of up to five years. Understanding the role of money in the economy has always been an important issue for policymakers. And the pickup in broad money growth and decline in credit spreads over the past three years together with more recent financial market turbulence has made it a particularly pertinent issue. Monetary data can potentially provide important corroborative or incremental information about the outlook for inflation. Quantitative easing is essentially a policy aimed at boosting money supply.
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