Money supply breaches target

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The Independent Online
THE AMOUNT of cash in the economy grew by almost 4.5 per cent in the year to January, breaking through the Government's 4 per cent target ceiling for the first time in two and a half years, official figures showed yesterday.

Both the Government's key targets for money growth are now being breached. Growth in the broader measure of money M4 - which includes bank and building society accounts as well as cash - is below the 4 per cent floor of its 'monitoring range'.

The narrow measure of money M0 - which includes bankers' deposits at the Bank of England as well as cash - has been accelerating rapidly, growing at an annual rate of around 8.5 per cent between November and January.

Nigel Richardson, of Yamaichi International, said the figures showed that the economy might not be as depressed as the Chancellor appeared to believe. 'M0 shows that Tuesday's base rate cut was a political and panic-stricken measure,' he said.

M0 is seen as a contemporaneous proxy for consumer spending. Its acceleration is thus at odds with December's fall in retail sales. Mr Richardson believes that 'the sales figures should be regarded with more suspicion'.

But cuts in base rates may help to explain why narrow money is overshooting its target. Lower rates reduce the incentive to hold wealth in interest-bearing savings accounts rather than cash.

The pound fell to its lowest against the mark in almost four months at one stage yesterday, but closed little changed on the day at DM2.3980. The Irish punt remained under pressure in the ERM. The French franc weakened during the morning but recovered later.

Hopes of help for the punt and franc in the form of an early cut in German interest rates dimmed as the state of Hesse said inflation was up to 5.1 per cent in January.

The Bundesbank president, Helmut Schlesinger, said preliminary figures from the western states suggested a January inflation rate of 4.4 per cent, more than double the bank's target.

Mr Schlesinger said in Brussels yesterday that EC states are likely to miss their first chance to switch to a single currency in 1997 and will have to wait until 1999.