UK monetary trends have weakened over the past year but are probably consistent with GDP growth of close to trend.

The narrow non-financial M1 measure rose by 0.4% in July from June*. Annual growth slipped further to 7.2% but remains above a low of 6.6% reached in 2015 and is not far short of equivalent Euroland expansion of 8.8% – see first chart.

The broader non-financial M4 measure rose by 0.2% in July, while annual growth subsided to 4.4% – equal to a February 2015 low but close to Euroland non-financial M3 expansion of 4.6%.

Non-financial M4 understates broad liquidity expansion at present because it excludes holdings of National Savings and foreign currency deposits, which have been rising strongly – by 10% and 23% respectively in the year to July. Annual growth of an expanded aggregate – “non-financial M4+” – including these two items was 5.6% in July and has fallen by less than that of other measures over the past year.

The strong increase in foreign currency deposits may partly reflect companies switching out of sterling deposits to protect against further exchange rate weakness.

While nominal money expansion remains respectable, real-terms growth has been squeezed by higher inflation. The six-month rate of change of seasonally-adjusted consumer prices, however, subsided in June / July, driving a small recovery in six-month real money growth, in turn suggesting that economic prospects have improved at the margin – second and third charts.
 

The Bank of England's preferred broad aggregate, M4ex, has slowed more sharply than non-financial M4 over the past year – fourth chart. M4ex also excludes National Savings and foreign currency deposits but includes money holdings of “non-intermediate other financial corporations” – annual growth of such deposits plunged from 20.9% in April to 4.8% in July. This reflects unusually large monthly increases over May-July 2016 dropping from the calculation and is unlikely to have any implication for economic prospects.

*Non-financial = held by households and private non-financial corporations. M1 = notes / coin plus sterling sight deposits. M4 = M1 plus sterling time deposits, bank securities of up to five years’ original maturity and repo claims on banks.