Thursday, January 26, 2012

What Impact Has Quantitative Easing had on the Money Supply?

(M0) Notes and coins

Since quantitative easing has been implemented, (£275bn of asset purchases by Bank of England using created money) UK narrow money (notes and coins) growth has been relatively stable.

M4 Lending and Retail Deposits

m4 lending and deposits

M4 lending and Liabilities to private sector have shown a negative growth rate since 2010.

M4 Growth has been much lower. If we exclude the impact of bond purchases, M4 growth has been negative.

m4 lending
M4 Lending (B62Q) , excluding the impact of securitisations, and excluding intermediate OFCs

This shows that banks have been reluctant to lend the extra reserves they gained from the Bank of England asset purchase scheme. It shows that underlying M4 money supply growth has been very low and at times negative.

Why Inflation?

To complicate matters, the UK saw a surge in headline inflation during 2011. CPI reaching 5.2%. However, this inflation was not caused by rapid growth in the money supply. It was caused by a combination of supply side factors, which caused a temporary blip.
  • Higher import prices because of devaluation
  • Impact of higher tax rates (e.g. VAT0
  • Rising commodity prices, especially energy and oil.


1 comment:

QP said...

This post demonstrates how mistaken the claim that the central bank controls the money supply is. If you were to extend the M4 lending plot back earlier you would see that it started to climb significantly from 2002 when the housing bubble started. New money in the economy is produced by the commercial banks creating loans, those banks look for reserves later. As a result the "fractional reserve" model that has deposits creating loans is completely false.