Understanding the Recent Weakness in Broad Money Growth

Abstract

The growth of broad money in the UK economy has slowed dramatically since the start of the recession. In part, that weakness reflects reduced borrowing by households and companies during the recession. But money balances held by asset managers also fell as deposits were used to purchase new equity and long-term debt issued by the banking sector in response to the financial crisis. Offsetting the weakness from these two factors was the programme of asset purchases — so-called ‘quantitative easing’ or QE — conducted by the Bank of England on behalf of the Monetary Policy Committee, which boosted broad money holdings. The evidence from the monetary data suggests that the programme of asset purchases contributed to an increase in asset prices and, ultimately, an increase in nominal demand in the economy, corroborating other evidence from financial market prices.