New Star's Simon Ward comments on November's monetary data:
The withdrawal of foreign funding may have contributed to the further tightening of banks' lending standards over the last three months reported in the latest Credit Conditions Survey. The stock of foreign net sterling lending to banks stood at £152 billion at the end of November, implying the potential for a further significant outflow.
Other key features of the detailed monetary data for November include:
Underlying broad money trends remain very weak, though could be stabilising. Annual growth in M4 excluding money holdings of financial corporations edged up to 3.9% from 3.8% in October. In real terms, i.e. adjusted for RPI inflation, the improvement was more significant, from -0.4% to 0.9%.
The liquidity squeeze remains focused on the corporate sector - M4 holdings of private non-financial corporations (PNFCs) fell a further 1.6% in November, to stand 6.2% lower than a year before. Companies are running down cash balances because of a profits squeeze and ongoing difficulties accessing credit - bank lending to PNFCs contracted by 0.4% in November, cutting the annual growth rate from 6.4% to 4.9%.
Household money holdings rebounded by 0.6% after a highly-unusual 0.5% fall in October, for an annual growth rate of 5.9%. The October decline was partly due to a "safe haven" shift out of bank and building society deposits into Treasury bills, gilts and National Savings in the wake of the Bradford & Bingley and Icelandic bank failures. This flow partially reversed in November: UK residents sold £9 billion of Treasury bills after purchases of £12 billion in October.
Narrow money M1 - currency plus sight deposits - could also be bottoming: the annual rate of change improved from -1.9% to -0.9%, or from -5.8% to -3.8% in real terms.
The average interest rate paid on M4 deposits fell by 55 basis points in November but this was matched by a decline in the average M4 lending rate, possibly reflecting government pressure on banks to "pass on" official rate cuts. The lending-deposit rate spread - a proxy for banks' net interest margin - remains at its lowest level in the 10-year history of the data. Banks need a wider margin to enable them to rebuild capital to support higher lending.
Recent monetary trends are consistent with the recession continuing until mid-2009 but a recovery is still possible later in the year if policy changes to emphasise direct measures to lift money and credit growth. By contrast, further Bank rate cuts and sterling depreciation are likely to confer little stimulus and may prove counterproductive if they serve to accelerate foreign withdrawals from the banking system.
