Operation of monetary policy

• Financial markets-for much of the time dominated by developments in the United States-were unusually volatile in the three months to mid-November (the period with which this review is principally concerned).
• A sharp rise in short-term interest rates in September was prompted by both external and domestic considerations. After an uneasy period, confidence revived in November, helped by a significant fall in US interest rates.
• The monetary aggregates remained heavily distorted by the effects of the Civil Service dispute, but there was further evidence of a sharp underlying rise in bank lending to the private sector.
• Official influence on interest rates was exercised through the operation of the new monetary control arrangements, which worked satisfactorily.
• Without official action, there would have been a large cash drain from the banking system to the Exchequer this autumn. Much of the effect of the unwinding of the Civil Service dispute on the cash position of the banking system has yet to occur.
• Developments on the foreign exchanges and in the United States dominated sentiment in the gilt-edged market. Large official sales became possible early in October and again in the first half of November.
• Equity prices fell heavily in September as interest rates rose. This may have delayed the announcement of some new equity issues; but the total of net equity capital raised this year is still likely to be nearly double that of 1980, and will be the highest in real terms since 1976.

Operation of monetary policy