M0 growth points to buoyant high street

GROWTH in the narrow money supply measure M0 - largely notes and coins - accelerated further above the ceiling of the Government's 'monitoring range' in July, suggesting that high street spending is still buoyant.

The measure grew by 4.8 per cent in the year to June, up from 4.4 per cent the previous month and the highest growth rate since the year to April, according to figures from the Bank of England. Economists had expected the growth rate to be unchanged on the month but still above the 4 per cent ceiling of the monitoring range.

M0 is regarded as a good indicator of high street spending, although the relationship is weak in any particular month. Ian Shepherdson, economist at Midland Global Markets, said the July figure had been boosted by an unexpectedly large rise in bankers' balances at the Bank of England.

Mr Shepherdson said the underlying growth rate of M0 was pretty flat, with the notes component decelerating. He said he expected retail sales to drop slightly in July following the large increase in June as the summer sales got off to an early start.

John Marsland, of UBS, said the figures showed no domestic case for a cut in base rates, but the pound was likely to rise. 'The Chancellor should cap the rise in sterling by cutting UK base rates to 5 per cent by the end of the year,' he added.

The money supply figures also showed a record pounds 5.7bn of gilts sales in June. The figure was boosted by the auction of pounds 3.25bn of benchmark 10- year bonds. About pounds 1.1bn was sold to overseas buyers, pounds 1.5bn to banks and pounds 3bn to the non-bank private sector, largely pension funds, insurance companies and the public. The banks now hold more than pounds 10bn of gilts.

Michael Saunders, economist at Salomon Brothers, estimated that a net pounds 27bn of gilts had been sold since the financial year began in April. This leaves about pounds 18bn to be sold in the rest of the financial year to fund the Government's borrowing.