Tuesday’s UK monetary update and will-they-or-won’t-they extend Quantitative Easing datapoint is brought to you by one of the most obscure Bank of England financial measures – money supply excluding intermediate other financial corporations.
This is a measure that’s been talked about before on FT Alphaville, but today is the first time since the first-quarter of the year — before QE had even really begun — that we are getting a published reading for M4 and M4 lending ex-IOFC. The figure may provide an important hint as to whether the BoE will choose to extend QE when its monetary policy committee meets later this week. In the last MPC meeting M4 ex-IOFC was the only money supply measure mentioned.
As a quick recap, money supply ex-IOFC is, according to the BoE, an “economically more relevant measure” of broad money than that based on the traditional M4 definition. IOFCs include central clearing houses, bank holding companies and SPVs, so excluding them, it is argued, gets rid of the distorting effect of their activities. Here’s a more detailed explanation from JP Morgan economist Allan Monk:
These “intermediate other financial corporations” (or IOFCs) include central clearing counterparties and special purpose vehicles set up to facilitate securitization. The BoE’s explanation for this is that, since the market for securitized products has shut down, SVPs have instead issued mortgage backed securities to their parent banks in exchange for money, which in turn creates a new deposit within the banking system. This has therefore boosted M4. One simple way to sidestep this problem would be to focus solely on the money holdings and lending to households and firms.
One simple way to sidestep this problem would be to focus solely on the money holdings and lending to households and firms. But there is good reason to include the money holdings of some of the “other financial corporations” sector. In particular, life assurance and pension funds would be expected to see a rise in their holdings of deposits as gilts are sold to the Bank of England under QE. The MPC has hence directed attention to the data on M4 excluding intermediate other financial corporations (M4 ex IOFCs) as the key broad money aggregate.
Doing so, however, results in a very different picture of the British money supply, with growth much lower of late than the more traditional M4 measure.
To wit, here is the latest data from the BoE via Reuters:
LONDON, Aug 4 (Reuters) – Britain’s M4 broad money supply exluding the holdings of intermediate other financial corporations, rose by 3.1 per cent year on year in the second quarter of 2009, the Bank of England said on Tuesday.
In the first three months of the year, M4 excluding intermediate OFCs rose by 3.8 per cent, downwardly revised from the 3.9 per cent in an earlier report, the BoE said.
Contrast that with the circa 13 to 17 per cent M4 year-on-year growth rates seen in June and May, and one could come to the conclusion that the BoE might *just* be able to convince itself of the need for some more QEasing.
Related links:
Money, money, money, ex-IOFC - FT Alphaville