The latest M4 data reveals a subtle increase in liquidity, with a 0.1 percent rise in December, following a stagnant November. While this suggests a slightly more active financial environment, the annual growth slowdown from 3 percent to 2.5 percent indicates a moderation in monetary expansion. This deceleration could act as a natural brake on inflation, as slower liquidity growth tempers lending and investment activity, reducing excess demand in the economy.

However, when excluding intermediate other financial corporations, the monthly growth of M4 is more pronounced at 0.3 percent, with annual growth holding at 3.1 percent. This suggests that households and businesses continue to maintain a healthy level of monetary expansion, possibly supporting consumption and investment despite broader liquidity constraints.

M4 lending fell 0.8 percent on the month, pulling down the year-on-year growth rate to 0.8 percent, the weakest in nine months. But excluding intermediate other financial corporations, M4 lending was up a monthly 0.2 percent and 1.9 percent higher than in December 2023. Elsewhere, mortgage approvals increased from a seasonally adjusted 66,061 to 66,526, while home lending contracted £0.513 billion after falling £1.900 billion in November. Overall consumer credit rose £1.030 billion after November's £0.390 billion rise.

The mixed signals from the data highlight a delicate economic balance-while the overall slowdown in M4 growth may be disinflationary, the resilience in core liquidity suggests that the economy is not facing an abrupt tightening. Moving forward, policymakers will likely monitor whether this trend supports stable inflation without hampering economic activity, ensuring that financial conditions remain conducive to sustainable growth. This update leaves the RPI at minus 26 and the RPI-P at minus 31. This means that economic activities remain well behind market expectations.

M4 is the Bank of England's main broad measure of money supply. There is no target for M4 and in practice the central bank tends to follow an adjusted measure that excludes intermediate other financial corporations in order to get a handle on current underlying trends. The M4 private sector lending counterpart is the most closely watched aspect of the report.

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.