M4 Broad Money

M4 broad money is the UK’s most comprehensive official measure of the money supply, encompassing all deposits held by banks and non-bank financial institutions on behalf of the private sector and the public sector, alongside other monetary instruments. It is the widest definition published by the Bank of England, designed to capture the full stock of purchasing power available in the economy.

Structure and components

M4 is defined as the sum of notes and coin in circulation held outside the Bank of England, plus all sterling deposits held at monetary institutions by UK residents and non-residents excluding the central bank. This encompasses retail and wholesale deposits, sight and time deposits, deposits held at banks, building societies, and certain other financial institutions authorised to take deposits.

The measure is broken down into two principal components. M4 core (often denoted M4c) includes deposits from the household and non-financial business sectors—in effect, the “real” private economy. This is sometimes used by analysts as a tighter gauge of demand-side money. Broader M4 adds deposits from financial institutions themselves and certain other entities, capturing the full stock of money in the system including interbank lending flows.

The Bank of England, like most European and Commonwealth central banks, publishes M4 monthly alongside narrower aggregates M1 and M2, which capture currency plus demand deposits and some savings deposits respectively. The progression from M1 to M4 reflects increasing inclusivity and illiquidity: M1 is the medium of exchange; M2 adds some near-money; M4 includes all deposits regardless of maturity.

The role of building societies and non-bank lenders

A distinctive feature of UK monetary accounting is the inclusion of building society deposits in M4. Building societies are mutually owned financial institutions that historically specialised in residential mortgages and savings. Deposits held at building societies are economically equivalent to bank deposits—they are liquidity held by households and firms for spending—and the Bank of England, rightly, counts them as money.

This inclusion reflects institutional realities. In the UK, building societies are authorised deposit-takers, and ordinary savers may hold significant balances with them. Excluding building society deposits from the money supply would misstate the true stock of liquid purchasing power available to the public, especially in regional economies where building societies historically held larger market share.

Additionally, M4 includes deposits at certain other non-bank lenders, such as credit unions and other authorised financial institutions. The principle is consistent: if an institution is licensed to take deposits and those deposits are held by households or non-financial firms, they are counted as money.

Narrower and broader variants

The Bank of England publishes several variants to cater to different analytical needs. M4ex is M4 excluding intermediate financial institutions, focusing on the “real” private sector and general government. This variant attempts to strip out financial-institution circularities—situations where banks deposit funds with each other, creating double-counting at the economy-wide level.

There is also M4 seasonally adjusted, which attempts to remove regular, predictable fluctuations (such as increased spending before Christmas). Seasonally adjusted M4 is often used for trend analysis, while unadjusted M4 is useful for spotting unusual movements that might signal economic shifts.

These variants exist because M4, whilst broader than most other aggregates, is still a complex measure. The boundaries between what counts as a monetary institution and what does not can be fuzzy, and overlaps between institutions create measurement challenges that seasonal adjustment and sectoral filtering aim to address.

Monetary policy and inflation targeting

M4 broad money growth is one signal the Bank of England monitors when setting interest rates and considering monetary policy stance. If M4 is expanding rapidly, and growth is outpacing real output growth, it suggests monetary conditions are loose and inflation pressures may be building. Conversely, sluggish M4 growth signals tight conditions and deflationary risk.

However, the Bank of England’s reliance on M4 as a policy guide has fluctuated. During the 1980s and early 1990s, monetary targeting based on aggregates like M4 was a central pillar of UK monetary policy. The central bank would set growth targets for M4, and policy was adjusted to keep growth within a band. This regime eventually gave way to formal inflation targeting in 1992, with interest rates adjusted to keep inflation near a target level rather than targeting money growth directly.

In the years since, M4 has been downgraded from a primary policy lever to a supplementary indicator. The 2008 financial crisis and subsequent quantitative easing—in which the Bank of England purchased government bonds and expanded the monetary base dramatically—saw M4 surge whilst inflation remained subdued for years, casting doubt on the mechanical relationship between money growth and prices.

M4 after quantitative easing

The post-2008 era revealed both the value and limitations of M4 as a policy signal. QE caused M4 to expand massively as the Bank of England injected reserves into the banking system. Yet inflation stayed low for a decade, raising the question: if M4 growth does not translate to spending and prices, what is its predictive value?

Economists offered several explanations. Some argued that deposits created by QE were not “real” money in the classical sense—they were held by banks and financial institutions as reserves, not deployed for consumption or investment. Others noted that private credit growth (loans made by banks to households and firms) had collapsed, offsetting the money-creation effect of QE. The velocity of money, the ratio of nominal spending to the money supply, had fallen sharply, meaning a given stock of M4 was doing less work.

The Bank of England’s inflation surge of 2021–2023, following the pandemic, again raised the profile of M4 as a diagnostic. By 2022, M4 growth had accelerated sharply, and the Bank of England tightened policy aggressively. Yet the lag between M4 growth and actual inflation turned out to be highly variable, making the aggregate less reliable as a real-time policy guide than some advocates had suggested.

International comparison

M4 is not unique to the UK; other countries use similarly broad definitions. The eurozone’s M3 is comparable—it includes all deposits by the public and financial institutions. The US publishes M3, though it was discontinued as an official focus in 2006; the broadest measure now actively monitored is MZM, which is roughly similar to M4 in spirit if not in exact components.

The differences reflect institutional structures. The UK’s reliance on building societies, for instance, is a legacy of a specific financial history; the US has a larger shadow banking sector (non-bank lenders, money market funds), which the Fed captures differently. Despite these variations, all broad money aggregates share a common purpose: to measure the full stock of liquidity available to the private economy.

See also