Chart of the week: 7-13 May 2012

This week’s chart of the week (actually, charts) looks at the Bank of England’s decision to pause its government bond purchases (i.e. quantitative easing) at the current level of £325bn.

Ostensibly, policymakers are worried about prices. CPI inflation currently stands at 3.5%, above the Bank’s 2% target. But in spite of the Bank’s asset purchases, which have increased the monetary base by nearly 300% since March 2009, there is no evidence that this is feeding through to broader monetary aggregates. Indeed, M4 (broad money) has been shrinking since late 2010 – and at an accelerating rate!

Why the discrepancy between QE and falling M4? Because the money multiplier has collapsed, from more than 20 pre-crisis to 7.8 in March 2012. So all this extra monetary base the Bank is creating hasn’t fed through the broader money supply.

It’s therefore questionable that the QE measures up until now are inflationary. Rather, if policymakers want to affect broader monetary aggregates like M4, they’d have to go further up the risk spectrum than they’ve done so far, buying private assets that are less obvious substitutes for monetary base – and hence more likely to feed through to broad money.


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