He says markets are now discounting two 0.25 per cent rate rises in the next year but monetary trends show that policy is already restrictive.
Ward says: “The foundations of the current inflationary upsurge were laid in 2005-07 when the broad money supply M4 was allowed to grow at a 12-13 per cent annualised rate.”
He considers that to return inflation to the 2 per cent target over the medium term, the rate of M4 expansion needs to be brought down to 6-8 per cent a year. “The slowdown should be gradual – a collapse in money growth would risk transforming a painful economic adjustment into an unnecessary bust,” says Ward. He adds that M4 was still rising at an annual rate of 11.2 per cent in April but has been inflated by financial transactions related to the credit crunch.
He says: “Annual growth in M4 holdings of private non-financial corporations has slumped from a peak of 16.1 per cent last May to 1 per cent in April. Relative to retail prices, real PNFC M4 is contracting at the fastest rate since the early 1990s, suggesting growing risk of a slump in business spending.”
Ward believes that the MPC has little choice but to sit on its hands for the foreseeable future.