This article covers the three months from January to March 1988.
During the period under review, monetary policy continued to be conducted with the primary objective of maintaining sustained downward pressure on the rate of inflation. Policy also sought to achieve exchange rate stability, so far as it was compatible with the primary objective. In the Budget, a target range of 1%-5% for the growth of M0 was set for the financial year 1988/89; the assessment of monetary conditions will in addition continue to take into account the evidence of the other monetary aggregates and other indicators of the monetary and economic situation.
The policy dilemma created by conflicting indications from the domestic economy and from the exchange rate, which had been present almost continuously since early last year, became easier during January and the early part of February but then became particularly acute in March. Throughout the quarter the behaviour of the sterling money market and the gilt-edged market indicated a longer-term concern about the pace of growth of domestic demand and the outlook for inflation, while recognising the contrary short-term exchange rate pressures: this was reflected in the persistent upward slope of the money-market yield curve. The foreign exchange market, however, appeared to be influenced more by the prospects for the UK economy relative to those for other economies, and by the level of UK interest rates relative to rates in other countries.
Operation of monetary policy