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UK money supply growth turned negative for the first time since 2010 when comparable data collection began as higher interest rates weigh on lending, according to the Bank of England.
The annual growth in the amount of money in the UK economy, a measure known as M4ex, fell to minus 0.6 per cent in August, marking the first contraction since the data series was launched.
The contraction, which was revealed on Friday, reflects the impact of higher borrowing costs as the Bank of England raised interest rates — currently at 5.25 per cent — to quell high inflation.
“The decline in broad money shows that higher interest rates are working,” said Ashley Webb, economist at Capital Economics.
“Although interest rates have probably peaked, this effect will intensify as the Bank of England keeps rates at their peak until late in 2024 and the full impact of previous rate hikes is eventually felt,” he added.
August’s fall in broad money growth followed a decline in the rate since late last year. The figures suggest higher interest rates are working by reducing households’ and firms’ demand for borrowing, which should lead to softer activity and lower inflation, said Webb.
The M4ex money supply includes notes and coins in circulation with the public, together with all sterling deposits held with UK banks and building societies by the rest of the private sector.
The money supply has been negatively affected by quantitative tightening by the Bank of England since October 2022. Quantitative tightening refers to the reduction in the size of the bank’s holding of gilts and corporate bonds. The money supply is also reduced by households paying down their debt.
Households withdrew £300mn from banks and building societies in August, following two consecutive months of net deposits, the BoE data showed.
“These signs of dissaving should offer some support to consumer spending in the face of the headwinds from higher mortgage bills,” said Martin Beck, chief economic adviser to the EY Item Club.
Households also moved money from instant access deposits, which pay less interest, into deposits with a fixed term, which provides higher returns.
The data showed that the average rate on the outstanding stock of fixed-term deposits was 3.18 per cent in August, compared with 1.83 per cent for instant access deposits.
Friday’s data also showed that net mortgage approvals for house purchases fell from 49,500 in July to 45,400 in August, the lowest level in six months. Those for remortgaging dropped to their lowest level since July 2012, to 25,000 from 39,300.
Myron Jobson, analyst, at the investment platform Interactive Investor, said the fall in mortgage approvals suggested the market may have been anticipating a peak in interest rates. The Bank of England left the policy rate unchanged in September.
“Buyers and homeowners alike are happy to play the waiting game in the hope of getting a better deal,” said Hobson.
However, in August higher policy rates continued to feed through higher borrowing costs and higher returns on deposits.
The average interest rate on newly drawn mortgages rose 16 basis points to 4.82 per cent, the highest since 2008, the BoE data showed. The average interest rate on overdrafts, on personal loans and on credit cards all increased to 22.14 per cent, 9.1 per cent and 20.77 per cent respectively.
Source: Economy - ft.com
