Bank of England Governor Andrew Bailey is under fire for miscommunication in the run-up to this week’s MPC meeting. A much bigger error was the Committee’s decision a year ago to boost QE by a further £150 billion at a time when annual broad money growth – as measured by non-financial M4 – was running at 11.7%.

The extra QE contributed to annual money growth rising further to a peak of 16.1% in February 2021, with the additional monetary excess to be reflected in a higher inflation peak in 2022 and a slower subsequent decline than would otherwise have occurred.

So should the MPC have hiked this week? Annual non-financial M4 growth was still 9.3% in September but the three-month pace of expansion has moderated to an annualised 4.9%, not far above a 2015-19 average of 4.5% – see chart 1.

Chart 1

The view here has been that the MPC should move rates back to 0.5-0.75% to reinforce the recent monetary slowdown and then wait for guidance from the numbers. Sustained sub-5% expansion would be consistent with (core) inflation returning to target, though probably not before H2 2023.

Higher rates would be needed in the event of a credit-driven rebound in money growth. Bank lending expansion has weakened recently, partly reflecting the ending of the stamp duty holiday, but expected loan demand balances mostly improved in the latest Bank of England credit conditions survey – chart 2.

Chart 2

The MPC’s miscommunication / delay risks triggering a fall in sterling, which would magnify near-term inflation difficulties. The exchange rate appears to have been boosted in 2019-20 by overseas investors increasing their net sterling deposits at UK banks – chart 3. These inflows stopped in 2021 but a large stock position could be liquidated if investors lose faith in UK policy-making.

Chart 3

Additional monetary data confirm an earlier estimate here that global (i.e. G7 plus E7) six-month real narrow money growth fell slightly further in September, reaching its lowest level since August 2019 – chart 1. Allowing for the usual lead, the suggestion is that global industrial demand momentum – proxied by the manufacturing PMI new orders index – will weaken into end-Q1 2022 and possibly beyond.

Chart 1

Real narrow money is growing at a similar pace in the US, Japan, Eurozone and UK, i.e. there is no longer a monetary case for expecting superior US economic and asset price performance – chart 2.

Chart 2

Real narrow money growth remains relatively strong in Canada (one month behind), Australia and Sweden. Economic and / or inflation data have been surprising positively in all three cases, triggering policy shifts by the BoC and RBA – will the currently dovish Riksbank be next to capitulate?

Real money growth remains lower in the E7 than the G7, partly reflecting drags from Russia and Brazil, where monetary policies may have been tightened excessively – charts 3 and 4.

Chart 3

Chart 4

Money trends are perkier in EM Far East economies. Real narrow money growth remains relatively strong in Korea / Taiwan and has ticked up recently, while there have been notable rebounds in Indonesia, the Philippines and Thailand, partly reflecting reopenings – chart 5.

Chart 5

Will China be next? The worry has been that Evergrande fallout would lead to a tightening of credit conditions, aborting an incipient recovery in money growth due to modest policy easing since Q2. The October Cheung Kong business survey was hopeful in this regard: the corporate financing index (a gauge of ease of access to external funds) fell slightly but remains at a normal level – chart 6.

Chart 6

Monetarists have a straightforward response to the ongoing debate about whether global inflation is shifting to a permanently higher level: it won’t if global broad money growth reverts to its pre-covid norm.

While annual growth remains elevated, G7 plus E7 nominal broad money expanded at a 6.5% annualised rate in the three months to September, in line with the 2015-19 average – chart 7. Central banks won’t need to raise interest rates by much to contain inflation if this pace is sustained.

Chart 7
 

Money growth has slowed despite ongoing QE, suggesting a risk of an undershoot as these programmes wind down. The more likely scenario, however, is that a pick-up in bank lending provides offsetting support.

US commercial bank loan growth continues to firm, with the recovery underappreciated because of the distorting effect on headline data of PPP loan forgiveness – chart 8. The July Fed senior loan officer survey had signalled stronger credit demand; an October survey is due shortly.

Chart 8

The corresponding ECB survey has already been released and showed a pull-back in credit demand indicators, although they remain in hopeful territory – chart 9. Actual loan growth, however, has remained modest / stable.

Chart 9