Operation of monetary policy

Quarterly Bulletin 1987 Q2
Published on 01 June 1987

This article covers the three calendar months from January to March 1987.

The period under review was dominated by increasing financial confidence in the run-up to the Budget and by bullish sentiment regarding the U K economy in general and the fiscal prospects in particular. The Budget was well received by the markets, as was the Chancellor's forecast of a PSBR of only £4 billion in 1987/88. The markets' response to these developments was sometimes magnified by reaction to political sentiment as revealed by the opinion polls. In the domestic markets, the bullish tone was manifested in strong downward pressure on short-term interest rates and gilt-edged yields. In the foreign exchange market, where sterling also benefited in the wake of the Louvre accord in mid-February, it resulted in strong upward pressure on the exchange rate. These conditions created a dilemma for the authorities. On domestic grounds, there was a reluctance to see interest rates fall too far or too fast: at the same time a substantial rise in the exchange rate would have had damaging consequences for industrial confidence.

PDFOperation of monetary policy


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