Operation of monetary policy

Developments during the first half of the period under review-until the announcement of the date of the general election-were dominated by continued market pressures for a rise in sterling and lower domestic interest rates, intensifying the dilemma for policy faced during the previous quarter. The authorities did not wish to see interest rates fall too sharply, with the economy already buoyant and monetary indicators suggesting prospective levels of demand which could put upward pressure on inflation in the near term. But, equally, they were reluctant to see a sharp and unsustainable exchange rate appreciation damage the re-emergence of industrial confidence and deter long-term decisions to expand capacity.

Operation of monetary policy