M4 data show no sign QE policy working

LONDON (Reuters) - The Bank of England’s 125 billion pound quantitative easing policy had no visible effect in boosting bank lending or the money supply in its first two months of operation, central bank data showed on Tuesday.

Pedestrians walk past the Bank of England in London February 5, 2009. REUTERS/Stephen Hird

M4 broad money supply rose by 0.2 percent in April, the smallest increase since October 2007 and slower even than March’s 0.3 percent rise, while annual M4 growth fell to 17.4 percent from 18.1 percent.

The Bank of England spent almost 50 billion pounds buying gilts, commercial paper and corporate bonds with newly-created money in March and April, but economists said that so far there was little clear benefit.

“Taken together, the level of household and corporate M4 has been flat over the past two months. Given that quantitative easing was launched in March, we consider this to be somewhat disappointing,” said Philip Shaw, UK economist at Investec.

“Admittedly it is a little early to be witnessing clear upward trends in broad money growth in these sectors, but we might have hoped to see some initial signs,” he said.

The message from M4 lending to households and companies was no better. M4 lending outright contracted by 0.6 percent in April, the biggest fall since records began in August 1982, and the 10.2 percent annual growth was the weakest since 2006.

M4 lending to households, excluding securitisation, grew 0.2 percent in April, the same as in March and the joint-lowest rate since August last year. M4 lending to non-financial companies fell by 0.9 percent, the biggest drop since November 2004.

Even smoothing out monthly volatility by looking at the three month trend, the picture was no better, said Richard McGuire, fixed income strategist at Royal Bank of Canada.

“While these data refer to only the second month of the BoE’s foray into unconventional policy territory, they will clearly do little, if anything, to reassure the Bank its QE efforts have begun to bear fruit,” McGuire said.

Bank policymakers admitted last month that the first month’s money supply data had not provided clear evidence quantitative easing was working, but still voted unanimously to expand the size of the scheme to 125 billion pounds from 75 billion pounds.

Reporting by David Milliken, editing by Mike Peacock