A strong acceleration in global real money supply growth in late 2008 suggested that economic activity would bottom in spring 2009 and recover during the second half – see here and here. Recent news remains consistent with this scenario.

Industrial output in the Group of Seven (G7) major economies fell by 19% between February 2008 and March 2009 but has recovered by 1% by May. This reflects a rebound in Japan, Germany and France, which had suffered more severe declines, offset by a continuing slide in the US, partly reflecting auto sector woes.

Purchasing managers' surveys show that new orders are stabilising while companies are still cutting stocks. As destocking slows, firms will need to place additional orders with suppliers, who in turn will be forced to raise production. The second-quarter Conference Board Chief Executive Officer survey released earlier this week signals an imminent recovery in US industrial output – see first chart.

The big story of the first half, however, has been the rebound in emerging economies – second chart. Industrial output in seven large emerging economies – the BRICs plus Korea, Taiwan and Mexico – rose by 3% in the six months to May versus a 10% contraction in the G7. Surveys indicate further acceleration.

This "E7" pick-up is not just about China – third chart. Output is on a rising trend in five of the seven economies, the exceptions being Mexico – which will benefit from a US recovery – and Russia. This reflects a rebound in world trade and effective monetary stimulus in economies where banking systems are still functioning normally.

Emerging world strength coupled with improving G7 prospects suggest that a solid "Zarnowitz" recovery in global activity remains possible – see here and here for a discussion. Credit supply constraints in developed economies are not an immediate obstacle to this scenario since credit demand is usually weak in the first year of economic upswings.

There are two key risks. First, labour market deterioration could lead to a further lurch down in consumer spending, aborting the stocks-led industrial recovery. The US June employment report was disappointing but leading indicators give a more hopeful message – for example, the number of job cuts announced last month was the lowest since March 2008, according to outsourcing firm Challenger, Gray and Christmas.

Secondly, real money growth could slow as weak credit trends offset QE and higher commodity prices lift inflation. This is less of a concern in the US and UK – the Fed and MPC are likely to calibrate asset purchases to ensure stability – than the Eurozone, where M3 is stagnant and the effectiveness of the ECB's QE alternative is in doubt.

There are three possible reasons for the MPC's decision today to maintain the asset purchase programme at £125 billion, against expectations of an increase.

First, the Committee may judge that the scheme is working as planned and there is no need for a further expansion. Arguments in favour of this view include recent stronger broad money growth and improvements in loan availability reported in last week's Credit Conditions Survey.

Secondly, and more likely, the MPC is inclined towards an extension but wishes to slow the pace of buying and avoid the impression of an open-ended commitment. The August Inflation Report forecasting round provides a convenient excuse for deferring an announcement, while maintaining the £125 billion cap will automatically cut gilt-buying from £6.5 billion to £4 billion per week.

Thirdly, and least likely, the MPC judges that any positive effects are small relative to possible damage to its inflation-fighting credibility from continuing with the policy.

The absence of any guidance about these alternatives in the MPC's news release is surprising and may indicate disagreement within the Committee.

A reasonable strategy would be for the MPC to utilise the £25 billion still available under the existing authority in August while spreading purchases over two months, implying a further slowdown to £3 billion per week. Assuming more evidence of positive effects and wider economic improvement, the programme could be suspended at the October meeting.

A previous post used Bank of England effective interest rate data to show that – contrary to the consensus perception – UK banks' aggregate net interest margin on sterling business remained stuck close to a record low. The margin, however, was expected to improve gradually as high-cost term funding was refinanced at lower rates and banks began to benefit from wider spreads on new lending.

May effective rate statistics released last week are consistent with this story. The average interest rate charged on M4 lending was unchanged on the month, while the average rate paid on M4 deposits declined, mainly reflecting falls on time deposits and notice accounts – see chart. The spread, or net interest margin, therefore rose to its highest level since January.

This may, in fact, understate the improvement in net interest income since banks have also benefited from a falling cost of wholesale funding needed to plug the £490 billion gap between M4 lending and deposits. The spread between three-month unsecured and secured interbank borrowing rates has fallen from 120 to 50 basis points since the start of 2009.

Higher net interest income is needed to provide resources to cover write-offs and support future lending. The current M4 lending / deposit rate spread of 2.1 percentage points compares with an average of 2.8 over 1999-2008. A return to this average would boost UK bank's pre-tax profits by £14 - 17 billion per annum.