Notes and coins in circulation, which make up most of M0, rose 0.6 per cent this month. This would be consistent with a bounce in retail sales after their steep fall last month. The annual growth of cash in circulation edged up to 6.1 per cent.
A smaller rise this month in the other component of M0, banks' operational deposits at the Bank of England, meant the total increased by 0.5 per cent. This was a sharper rise than expected but brought the 12-month growth rate down to 6.2 per cent from 6.5 per cent in January. It was the slowest annual growth rate of narrow money since last April.
Although the bankers' deposits element is volatile, reflecting money market conditions, M0 growth has clearly come down from its peak of 7.1 per cent in October. The new trend encourages economists who believe M0 is a good indicator of inflation. Andrew Cates, an economist at UBS, said: ``It seems to have provided advance warning of the modest rise in inflationary pressure.''
The usefulness of M0 as an indicator of inflation during the past two years was diminished by slower circulation of cash as interest rates fell. As the cost of holding cash (as opposed to depositing it in the bank) fell, people held more notes and coins. With interest rates rising, the distortion in M0 is fading.
Mr Cates said: ``The Bank of England and the Treasury will be increasingly concerned the longer M0 grows well above the top of its monitoring range.'' But Kevin Darlington, chief economist at ABN-Amro Hoare Govett, said M0 growth was unlikely to be top of the authorities' worry-list at their 8 March policy meeting.