UK Credit and Money Growth at Extremes

Easy monetary policy in the UK is looking ever more inappropriate.  Divisia money is a weighted money-supply measure.  Higher forms of money, eg notes and coins have greater weights than less liquid forms of money, such as building society deposits.  Thus Divisia money supply favours money that is more likely to be spent sooner rather than later.

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In the UK, this measure is now growing sharply, as the chart above shows.  Growing money supply is essential for economic growth.  However, money supply that is growing by too much can fuel bubbles and create instability.  In the UK, zero rates and forward guidance have encouraged a wave of borrowing.

Forms of consumer credit are now back to pre-crisis growth rates (chart below).  Mortgage rates have made new lows.  Borrowing is helping to exacerbate the current account deficit, already the largest in the developed world.  Higher rates are needed to help correct these growing imbalances, although the Bank of England remains concerned the economy is not yet ready to deal with them.

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