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Forex: Economics Weekly: Economic Research and AnalysisThe UK money supply and 'real' economy conundrum
Monetary and ‘real economy’ data diverge
In the last few months there has been a noticeable divergence of messages about the prospects for UK economic activity based on figures derived from the monetary and non-monetary sides of the economy. Economic growth rose by a less-thantrend 0.5% in Q1, with consumer spending up by just 0.3%, and showing the slowest annual pace since 2001. Manufacturing output was down by 0.8% in the first quarter, the biggest fall since 2002. But growth in the broad measure of money supply, M4, was up by 10.5% in the year to April, the fastest pace for five years, see chart A. We look at this conundrum in this week’s briefing, as it argues that consumers and companies are hoarding cash and could resume spending later in the year, so obviating the need for a cut in interest rates from the UK’s Monetary Policy Committee (MPC).
Worries about growth...
The MPC may have kept interest rates at 4.75% at the June meeting but the financial markets are betting that they will cut interest rates by 0.25% by August. If the consumer slowdown turns out to be deepening, we have no doubt that the MPC would do that and perhaps more, even if consumer price inflation was above target, as slower growth from the two-thirds of the expenditure measure of the economy that emanates from household spending would mean additional spare capacity was being added so that price inflation would eventually be below target. However, it may still be premature to assume that the MPC will cut interest rates based solely on the evidence of slower growth seen so far this year. Economic growth is likely to be around 2.5% this year, just 0.25% above the long run average and implying that the pressure on inflation from capacity constraints is fading. However, our latest view on interest rates is that one further rise is no longer required; but whether interest rates are cut will rest on whether the slowdown intensifies over the next few months. For now, base rates look like they may be kept at 4.75% for a few more months yet.
...are reflected in weaker M0 but not in M4
The current slowdown in the housing market and in consumer spending was precisely what the Bank intended when it raised interest rates from 3.5% in July 2003 to 4.75% in August last year. The evidence on house prices shows a flat picture this year, with monthly falls being offset by monthly increases.
Trevor Williams, Chief Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
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