1. Global monetary growth has been its fastest for decades over recent months, but we continue to believe inflation risks are lower than many think. A modest inflation overshoot in the coming years is possible but would not be very damaging. 2. While headline money growth figures still look strong, heavy precautionary borrowing by firms in March-April is already starting to unwind in the US and UK. About 80% of the rise in borrowing by large UK firms has been repaid. 3. In addition, tightened lending standards at banks are likely to weigh on future corporate borrowing and money growth. A net 70% of US banks tightened corporate credit standards in the latest Fed survey. Rising loan defaults risk exacerbating this. 4. Heavy government borrowing and accompanying central bank QE have been key drivers of monetary growth and are likely to remain so, notwithstanding a slowdown in the pace of central bank bond purchases. This is the main risk factor those who fear inflation cite. 4. But if credit to the private sector starts to shrink, deficit financing of this sort may be essential to prevent long-term weakness in money, credit, and economic growth. Japan's experience in the 1990s and 2000s is relevant here. 5. Inflation also has room to overshoot current targets, if necessary, given the substantial undershoots of the last decade. This consideration in part explains the recent shift in Federal Reserve thinking towards targeting an average inflation rate over time
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