Money Supply and Interest Rates

 With the Bank of England busy raising interest rates to punish the naughty people that have caused inflation on their watch, I thought it would interesting to look at money supply and see how it is impacted by interest rates.

Classic monetary theory is that if you increase money in the economy, then there will be growth and if you remove money from the economy it will contract or go into recession.

Therefore when the Bank of England raises interest rates it is reducing the money supply.

The main measure of money supply is M1 which covers all money in circulation.  M0 is the measure of cash however with declining use of physical cash it is becoming a less meaningful metric.

So here's the data from 2008 to May 2023

The Blue line is the money supply (in £M) and the red line is Bank of England interest rates. 

From this I would conclude the Bank of England allowed the money supply to grow until 2020 - it looks like they were asleep at the wheel. 

The drop in interest rates during the pandemic turbo charged money supply and probably property speculation.  

The rapid interest rate increases from early 2022 took 9 months to start having an impact. 

Now growth during this period has been pretty feeble.  The money supply has roughly doubled in 10 years but the economy has not doubled in that time.