§ The first reason for rapid monetary growth over the year is the abolition of the so-called corset. That was long overdue. All that the corset achieved was to make the published figures artificially low. since its removal last summer those distortions have been reversed, and the figures have been artificially high. By their very nature, such distortions are impossible to measure accurately. They are likely to have been substantial. But purely statistical changes have no implications for future inflation. The distortions have now largely worked their way out of the system. In that respect, sterling M3 will from now on be a better measure.
§ Again, the growth of sterling M3 was increased last year by the special nature of the recession. Public borrowing increases in a recession, but that is normally offset by lower private sector borrowing. Over the past 12 months public borrowing has been exceptionally high. But on this occasion bank lending did not fall away as quickly as might have been expected.
§ Because of the exceptional imbalance between business and personal incomes, both sectors, for different reasons, have borrowed heavily. Faced with an unexpectedly severe recession and the consequences of previous pay increases, businesses borrowed to tide them over while they reduced costs. Many people, on the other hand, have 762 seen their living standards rise to an extent unusual in a recession, and have been willing and able to borrow as well. The combined effect of that borrowing has been an important expansionary influence on sterling M3.
§ At the same time, there has been a high level of private investment in financial assets. That can be seen as an attempt by the private sector to rebuild its holdings of such assets, whose purchasing power had been sharply eroded by inflation. It has included an increase in holdings of interest-bearing money. But to the extent that it merely involves returning towards a more normal level of financial assets it need not fuel inflation.
§ Other indicators also suggest that the underlying financial conditions have, as the Government intended, been tight. Our Green Paper on monetary control, published a year ago, stressed the need to watch a range of measures of monetary conditions. Over the past 18 months the narrower measures of money have not grown at all rapidly. The pound has certainly been higher than would be expected from the behaviour of the money supply. That external pressure has reinforced the monetary squeeze and contributed to the fall in inflation. And inflation has fallen so much relative to interest rates that the real cost of borrowing has risen significantly.
§ Financial behaviour should now revert to a more normal pattern. The private sector has been moderating its borrowing from the banks, and the exceptionally rapid build-up of personal sector liquidity should come to an end as the growth of prices and incomes continues to slow down.