UK monetary trends satisfactory, EMU crisis boosts gilts

29th June 2011 by Simon Ward

Gilt yields were suppressed this spring by further semi-compulsory purchases by banks along with a pick-up in foreign buying, probably related to capital flight from the Eurozone as sovereign debt worries mounted.

The Debt Management Office issued £16.1 billion of gilts in May, while UK banks and overseas investors each bought £7.4 billion, with the rump taken up by domestic non-banks. Bank purchases totalled £33.5 billion, or 69% of net issuance, in the six months to May. Overseas buying in May was the strongest since December, in the wake of the Irish bailout – see first chart.

With banks’ liquid asset holdings at their highest for nearly 30 years, according to the recent Financial Stability Report, gilts are vulnerable to a slowdown in their buying, as well as reduced foreign purchases if a Greek financial support deal calms Eurozone debt markets.

Other features of today’s monetary statistics for May include:

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3 thoughts on “UK monetary trends satisfactory, EMU crisis boosts gilts”

  1. Anonymous says:

    Thanks Simon
    I remember the Bank of England seeking to boost nominal GDP to retrieve 5% lost by the 2008/09 crash in their asset purchase policy. M4x was their more economically relevant yardstick. An annualised growth of M4x of 1% looks extremely worrying, doesnt it having regard to what the BoE were seeking to do in 2009?

  2. Simon Ward says:

    Thanks for raising that. IMO M4ex growth of 1% annualised does not indicate tight money because 1) as noted, a broader measure including foreign currency is rising faster and 2) more importantly, the velocity of circulation is trending higher in response to negative real interest rates. Velocity has risen by about 3.5% annualised over the last two years. 1% M4ex growth plus a 3.5% velocity increase implies nominal GDP expansion of 4.5%.
    More about velocity here:

  3. Anonymous says:

    Thanks for the reference article. It seems to me that both of the trends ( growth and velocity) are not indicating real growth in positve activity and wonder if I should remain worried by both.

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