M4 in record fall despite QE

Figures released by the Bank of England show that M4 fell by 5.0% in the year to March 2012. This record fall comes despite over £320 billion of assets purchased by the Bank under its quantitative easing programme. These are funded by the creation of reserves in the Bank of England. (See the Bank of England site for details of the timing and amounts of QE.)

Because of the considerable injection of new money into the banking system, notes and coin plus banks’ reserve balances in the Bank of England rose by 44.9%. So how is it that this measure of narrow money has increased massively and yet M4 has fallen?

One problem with using figures for changes in M4 to gauge economic activity is that they include intra-financial sector transactions – transactions between ‘other financial corporations’ (OFCs). Such transactions do not impact on the real economy. For this reason, the Bank of England prefers to focus on a measure that excludes these transactions between OFCs, a measure known as ‘M4 excluding intermediate OFCs’. This measure rose by 2.7% in the year to March 2012. Although this was positive, it was still weak.

So why does quantitative easing seem to be having such a small effect on bank lending? The following articles look at the issue.

Record collapse in UK money supply blamed on banks The Telegraph, Philip Aldrick (2/5/12)
UK March mortgage approvals rise unexpectedly London South East (2/5/12)
UK March Net Consumer Lending +GBP1.4 Billion NASDAQ, Jason Douglas and Nicholas Winning (2/5/12)
M4 Hits Record Low; Non-Residents Sell Gilts Market News International (2/5/12)

Bankstats (Monetary & Financial Statistics) – March 2012 Bank of England (2/5/12): see Tables A1.1.1, A2.1.1 and A2.2.3


  1. How does quantitative easing impact on the narrow measure of money: notes, coin and banks’ reserve balances in the Bank of England?
  2. How might an increase in narrow money lead to an increase in broad money (such as M4)?
  3. How is it that notes, coin and banks’ reserve balances rose so rapidly in the year to March 2012, while M4 fell and even M4 excluding OFCs rose only slightly?
  4. Does this suggest that money supply is endogenous? Explain.
  5. How does requiring banks to rebuild their capital base impact on the relationship between narrow and broad money?