Professor Tim Congdon, a former Chancellor's 'wise man' now at Lombard Street Research, makes an interesting point in LSR's current Monthly Economic Review.

Non-monetary economists have argued that the rise in base rates from 3.5% in autumn 2003 to 4.75% in August 2004 would lead to a marked weakening (or even a crash) in the housing market, and a subsequent sharp downturn in domestic demand growth.

The monetarists, led by Lombard Street Research (esp. in their Oct. 2004 Review), have argued that a 4.75% base rate was insufficient to cut credit and money growth to levels consistent with target inflation. Instead they have argued that the annual rate of money growth would stay close to double digits. They predicted that early 2005 would see "resilience or even buoyancy" in domestic demand.

True, mortgage approvals in the four months to Dec 2004 were down by almost 30% from the same period in 2003. But:

In late 2004 the annual growth of the stock of mortgage debt was no less than 15%. So - if new lending drops by a third - the annual growth rate falls to 10%. 10% is still too high.

Since mortgages represent over half the loan assets of the UK banking system, non-mortgage credit would have to be particularly weak to prevent overall balance sheet growth. In fact the annualized growth rate of M4 in the three months to January 2005 was 10.4%, and that of M4 lending was 13.4%. The money growth implies inflation way above target levels.

Looking at the real world, "it is clear that the housing market is not collapsing and that consumer spending is steady." Corporate investment and the construction sector are also strong. While it is too early to say, and there is some mixed data, so far the monetarists seem to be proving better predictors of events than their non-monetarist rivals.