Monitoring ranges had a relatively short life span. They were introduced with inflation targeting in 1992, with the aim of bringing a degree of transparency to policy.

The ranges, 0 – 4 per cent for M0, and 3 – 9 per cent for M4 were not specific targets but indicated to observers the sort of growth rates which would be acceptable to the authorities in their pursuit of low inflation.

Difficulties with predicting the velocity of circulation, however, led the MPC to drop monitoring ranges in favour of a more pragmatic assessment of monetary conditions when it was given responsibility for formulating monetary policy in May 1997.

A pragmatic assesment replaces monitoring ranges

That pragmatic assessment is included in the quarterly Inflation Report issued by the Bank of England. The Report devotes a whole section to money and financial markets including an analysis of narrow and broad money.

To emphasise the continuing importance of money in the Bank’s thinking, Mervyn King, the Governor of the Bank of England, in a speech in June 2005, noted that a key risk to inflation, at that time, was the fact that broad money had been rising very quickly and, indeed, had shown signs of accelerating. This represented “an upside risk to domestic demand”.

That acceleration in money supply continued over the next two years. In the first half of 2007 it was still growing at an annual rate of around 13%. In its May 2007 Inflation Report, the Bank of England noted that “on average, over time, persistently high rates of broad money growth are associated with high inflation. But there have been sustained periods when the two have diverged.”

The problem for the MPC is that it is difficult to gauge whether strong money supply growth is a function of demand for broad money, perhaps, as the May 2007 Inflation Report explained, “due to shifts in portfolio preferences, which have no implications for the path of inflation” or of supply which “could put upward pressure on inflation.”

In 2008 and 2009, however, the problem has been the exact opposite with too little money circulating in the economy rather than too much and in March 2009 quantitative easing (QE) was introduced as a means of directly increasing the rate of monetary growth.

This in turn, it was hoped, would boost spending and, ultimately keep the inflation rate from falling too far below the Bank’s target of 2%. The August 2009 Inflation Report noted that “broad money growth remained weak in Q2” but commented that it would have been even weaker in the absence of quantitative easing.

Normally when the MPC is worried about weak activity and its effect on inflation, it would cut interest rates to stimulate demand. But by early in 2009 the MPC had already cut Bank Rate to nearly zero with little or no apparent impact on activity. QE was deemed to be the answer to the problem.