An overview of the effects of monetary policy in the UK on GDP and inflation, from 1949 to the present day.

% annual growth rate:

  M3/M4/M4x Nominal GDP
1949 – 2020 8.31% 7.63%
1951 - 1960 3.15% 7.33%
1961 – 1970 7.16% 7.63%
1971 – 1980 15.75% 16.13%
1981 – 1990 15.4% 9.75%
1991 - 2000 6.35% 5.97%
2001 - 2010 6.96% 3.93%
2011 - 2020 5.01% 3.03%

Sources: M4/M4X from Bank of England website and nominal GDP from Office of National Statistics, as at February 2022

The medium-term relationship between money and nominal GDP growth in the UK, 1961-2020

Five-year moving averages of annual % changes, with 1963 being the start of the first five-year period

Comment on monetary trends in the UK

Inflation was the top political problem in the UK in the 30 years prior to the introduction of inflation targeting in 1992. Initially British governments tried to combat inflation by ‘incomes policies’, which involved direct administrative controls on the rate of increase in prices and wages, and led to protracted negotiations between government, business and trade unions. Only in the 1980s, following the advance of ‘monetarist’ ideas in the public debate, was it accepted that monetary policy – and in particular control over the rate of growth of the quantity of money – should be used to control inflation.

The table shows an obvious link between the growth of money and nominal GDP. High money growth in the 1970s and 1980s was accompanied by the highest rates of increase in nominal GDP in the five decades under examination. By contrast, the years from the Great Recession until 2019 saw both modest growth of money and the lowest rates of increase in nominal GDP. Nevertheless, claims of a link between money and expenditure, and also between money and the price level, are highly controversial in the UK. Part of the explanation is that the defeat of inflation was top priority for the Thatcher government of 1979 – 90, which has been sometimes regarded as extreme in its commitment to free markets and sound money. But the main element in the official answer to the Great Recession – so-called ‘quantitative easing’ (i.e., deliberate action to boost the quantity of money), starting in March 2009 – made sense only if money was indeed related to incomes and expenditure.

Since March 2020, the monetary and fiscal response to the coronavirus pandemic has seen UK broad money growth  rise to its highest levels since the Barber and Lawson booms. By early 2022, inflation rose to levels not seen since the 1980s and the Bank of England has started to tighten monetary policy in an attempt to bring it down. However, there is always a lag between changes in broad money growth and their effect on asset prices and inflation. The Bank of England's response will do little to reduce inflation in the short term, but should see it fall to a significantly lower level by end of 2023 and closer to the 2% target by end 2024.