(Adds detail, analyst comment)
* M4 ex intermediate OFCs posts modest qq rise in Q2
* M4 ex intermediate OFCs weakest since 1999 on yy basis
* Data gives mixed message for BoE's Aug. 5-6 QE decision
By David Milliken
LONDON, Aug 4 (Reuters) - A key measure of British money supply closely watched by the Bank of England picked up in the second quarter of 2009 but remained sluggish, with the weakest year-on-year growth since 1999, data showed on Tuesday.
The BoE has said it will pay close attention to the quarterly data on M4 money growth excluding the holdings of financial intermediaries when it decides on Thursday whether to expand its 125 billion pound quantitative easing programme.
But economists were split on whether the Bank would focus on weak annual growth or a more upbeat quarter-on-quarter change, and questioned how much weight it could put on what they view as only preliminary evidence of the effectiveness of QE.
The central bank launched its QE progamme in March, with the aim of boosting the money supply to increase spending and growth in Britain's recession-hit economy.
Tuesday's data show M4 excluding holdings by intermediate other financial companies grew by just 3.1 percent year-on-year in the second quarter of 2009, the smallest annual increase since 1999 and less than the 3.8 percent year-on-year rate in the first three months of this year.
Before the credit crunch, M4 excluding intermediate OFCs was growing at a year-on-year rate of around 10 percent, and during the downturn it has fallen much faster than standard M4.
The BoE favours the former measure because it strips out the volatile and often inflation holdings of non-bank financial intermediation companies like clearing houses, which it believes correlate poorly with developments in the rest of the economy.
QQ DATA MORE OPTIMISTIC
On a quarter-on-quarter basis, the data is slightly more positive, growing at an annualised rate of 3.7 percent in the second quarter, up from 3.3 percent in the first three months of the year, though still below late 2008's 4.1 percent rate.
George Buckley, economist at Deutsche Bank, said the BoE should focus on the quarter-on-quarter data because the annual figures were distorted by base effects from faster money supply growth before Lehman Brothers collapsed last September.
By contrast, Investec economist Philip Shaw said the year-on-year data illustrated the slowdown in money supply growth more clearly.
Both agreed that it was still early to expect to see clear evidence of whether the BoE's asset purchases had succeeded in boosting the money supply, let alone their precise role in boosting demand.
"I wouldn't take too much comfort from the quarterly trend -- it's early to be making a judgment," said Shaw.
It would likely take another quarter at least before it became clear whether QE was effective, Buckley said.
This was because the commercial decisions which drove money growth for a given quarter tended to be made in the first month of the quarter and the last month of the previous quarter, meaning QE had only had a few weeks of operation to influence Q2 money growth, he said.
This argued in favour of looking at other economic data -- such as business surveys and jobless numbers -- in deciding whether to expand quantitative easing, he added.
"They have a lot more evidence of whether policy as a whole is working. They want to see growth return and inflation expectations remain anchored," said Buckley.
Given the economic slowdown had eased and the risk of deflation had ebbed away, more QE was now looking unlikley on Thursday, regardless of the M4 data, he said. (Editing by Richard Balmforth)