Recession fears after UK money supply stopped growing for first time in 13 years

UK money supply has stopped growing for the first time in 13 years – a warning sign that a recession is looming.

Bank of England data showed that the money supply was no larger in July than in June.

This is in stark contrast to the flood of money printed during the pandemic, which monetarists say was responsible for the surge in inflation after lockdown restrictions were eased and the economy restarted.

However, stagnant supply is raising fears of a recession and deflation or falling prices, which could prompt the bank to be more cautious about further rate hikes to avoid the economy going into reverse.

The money supply matters, as increases tend to lower interest rates and put more money into consumers’ hands, increasing spending and fueling inflation.

Risk of recession: Bank of England data showed the money supply in July was no greater than in June, in stark contrast to the flood of money printed during the pandemic

A shrinking supply has the opposite effect and usually slows down economic activity.

Former Governor Mervyn King said banks’ rate-setters ignored warning signs in money data.

He said: “If they keep tightening monetary policy over the next six months, they could trigger a recession and a sharp drop in inflation.”

The Bank of England has raised interest rates to 5.25 percent to curb inflation and is expected to hike rates to 5.5 percent next month.

Other figures show that UK households have parked their money in fixed-term savings accounts over the past month.

Data from the Bank of England showed £10.1 billion was deposited into accounts that paid interest after a set period, up from £6.5 billion the previous month.

Deposits in ISAs rose to £4.3 billion last month from £2.9 billion in June.