Normalising money growth is reducing inflation risks

Abstract

▪ Global money supply growth is starting to normalise, lessening the threat of high inflation. Upside risks to money growth remain, but timely action to rein in QE and modest rate hikes should be enough to keep inflation under control, in our view, and prevent a shift to a higher inflation ‘regime’. ▪ Money growth has slowed from a peak of 25% y/y to around 8% y/y in advanced economies, but the rate is still higher than the average of the past decade. In emerging economies (EM), money growth has already returned to normal levels. ▪ Our estimates of ‘excess’ money growth show it to be higher than is consistent with inflation targets in most advanced economies, especially the US. In EM, money growth looks excessive in Turkey and Nigeria but seems consistent with below‐target inflation in Russia, China, India, and South Africa. ▪ The main contributor to fast money growth in the advanced economies remains quantitative easing (QE) by central banks. Our forecasts suggest QE will remain a major contributor in the next few quarters before tailing off by late 2022. ▪ As QE fades, private credit will be the key driver of monetary growth. Our global indicator shows banks loosening credit standards at the fastest pace in a decade. Credit standards are still tightening in EM, but there's no sign yet of a post‐Evergrande financing crunch in China. ▪ Central bank surveys show signs of a revival in credit demand, although this recovery is patchy across economies and credit segments. Actual credit flows to the private sector are also picking up. But recent strength is concentrated in areas away from corporate lending, where loan growth remains negative or subdued in the US and Europe.