The latest data from the Sigmanomics database reveals a contraction of 0.20% in the UK’s M4 Money Supply for December 2025. This decline follows a steady expansion trend earlier in the year, with a 0.60% rise recorded in October and a 0.40% increase in November. The current reading is the first negative monthly growth since June 2025, when the supply was flat. Over the past 12 months, the average monthly growth rate stood at 0.25%, underscoring the recent deceleration.

Drivers this month

• Reduced bank lending amid tighter credit conditions.
• Government fiscal consolidation limiting liquidity injection.
• Weaker consumer demand and business investment.

Policy pulse

The Bank of England’s monetary stance remains restrictive, with interest rates steady at 5.25%. The contraction in M4 suggests liquidity is tightening, consistent with the central bank’s inflation-targeting framework. Money supply growth below the 0.40% consensus signals caution in credit markets and potential headwinds for economic expansion.

Market lens

Following the release, the GBP/USD pair slipped 0.15%, reflecting concerns over slower money growth. Short-dated gilt yields rose by 5 basis points, indicating market anticipation of tighter financial conditions. Equity markets showed limited reaction, with the FTSE 100 marginally down 0.30% in early trading.

The M4 Money Supply is a broad measure of money circulating in the UK economy, including cash, deposits, and liquid assets. Its growth rate is a key indicator of liquidity and credit availability, influencing inflation, consumption, and investment. The recent contraction contrasts with core macroeconomic indicators such as GDP growth, which slowed to 0.10% QoQ in Q3 2025, and inflation, which remains elevated at 5.10% YoY as of November.

Monetary Policy & Financial Conditions

The Bank of England’s policy rate has been on hold since October, following a series of hikes aimed at curbing inflation. The negative M4 growth suggests that monetary tightening is filtering through the banking system, reducing credit expansion and money creation. Financial conditions indices show tightening, with credit spreads widening and lending standards becoming more restrictive.

Fiscal Policy & Government Budget

Fiscal consolidation efforts, including spending cuts and tax adjustments, have reduced government borrowing. This fiscal stance limits the injection of liquidity into the economy, contributing to the slowdown in money supply growth. The government’s budget deficit narrowed to 3.20% of GDP in Q3 2025, down from 4.10% a year earlier, reinforcing the fiscal drag on liquidity.

External Shocks & Geopolitical Risks

Global uncertainties, including ongoing trade tensions and energy price volatility, have dampened business confidence. The UK’s trade deficit widened slightly in Q3, pressuring sterling and complicating monetary policy transmission. Geopolitical risks remain elevated, with potential disruptions to supply chains and financial markets.

The chart below illustrates the monthly M4 growth rates over the past 18 months, showing a clear deceleration trend since mid-2025. The recent dip below zero suggests a potential inflection point for credit availability and economic momentum.

Market lens

Immediate reaction: GBP/USD declined 0.15%, short-term gilt yields rose 5 bps, and FTSE 100 fell 0.30% post-release. The market interprets the contraction as a sign of tighter financial conditions, increasing caution among investors.

Looking ahead, the M4 Money Supply contraction introduces several scenarios for the UK economy:

Bullish Scenario (20% probability)

• Inflation eases faster than expected, allowing the Bank of England to ease policy in H2 2026.
• Credit conditions improve, restoring money supply growth to 0.40% MoM or higher.
• GDP growth rebounds above 1.00% QoQ, supported by fiscal stimulus and external demand.

Base Scenario (55% probability)

• Monetary policy remains restrictive but stable, keeping M4 growth near zero to 0.10% MoM.
• Inflation gradually declines toward the 2% target by late 2026.
• GDP growth remains modest, around 0.20-0.30% QoQ, with cautious consumer and business spending.

Bearish Scenario (25% probability)

• Further monetary tightening leads to deeper M4 contraction (-0.50% MoM or worse).
• Inflation remains sticky above 4%, forcing prolonged restrictive policy.
• Recession risks rise, with GDP contracting for two consecutive quarters.

Policy pulse

The Bank of England faces a delicate balance between controlling inflation and avoiding excessive credit tightening. The M4 contraction signals that monetary policy is effectively restraining liquidity but raises concerns about growth sustainability.

The December 2025 M4 Money Supply MoM contraction is a critical signal of tightening liquidity in the UK economy. It reflects the combined effects of monetary restraint, fiscal consolidation, and external uncertainties. While inflation remains a primary concern, the slowdown in money supply growth warns of potential headwinds for credit availability and economic momentum.

Policymakers and market participants should closely monitor upcoming data releases, including credit conditions, inflation trends, and GDP growth, to gauge the trajectory of the UK economy. The balance of risks suggests cautious optimism tempered by the possibility of sharper tightening or slower recovery.

In this environment, strategic positioning in financial markets should consider the evolving liquidity landscape and its impact on interest rates, currency strength, and equity valuations.