Commentary

The main concern of economic policy and the preoccupation of financial markets in the three months from August to October discussed in this Commentary was the growing domestic wage and price inflation. Unemployment was falling and output rising, though the development of the ma in forms of demand and output was uneven, with personal consumption buoyant and suppliers of consumer goods busy, while fixed investment was sluggish and manufacturers of capital goods were short of work. The effect of all these influences on the balance of payments was obscured by the U.K. dock strike. In the foreign exchange market, the floating sterling rate was fairly steady during August and the first half of September, but then fell sharply. The domestic money stock rose less quickly than in the previous quarter. The increase in bank lending to the private sector was also smaller, and the central government deficit showed no signs of reaching the amount expected in the Budget. But on 9th November the Bank called for Special Deposits from the banks and finance houses observing reserve ratios to help to moderate the effects on their liquidity of an anticipated sharp increase in the government deficit later in the year. Short-term interest rates fell back a little after the end of July but were still well above those prevailing in the first five months of 1972; and they rose again at the end of October. In the discount market, increases in Treasury bill rates took them above Bank rate, and, in October, the Bank linked their minimum lending rate directly with market rates.

Commentary