This article covers the three months from April to June 1988.
The period began with continuing strong upward pressure on the exchange rate which led to further reductions in short-term interest rates, to a low point of 71% by mid-May. However, it became increasingly apparent that there was a need to tighten monetary policy so as to exert downward pressure on inflation. During the second half of the period, underlying sentiment towards sterling weakened and interest rates abroad rose. Domestic interest rates were therefore increased in a series of 1% steps without creating undue upward pressure on the exchange rate.
Although in early April there were some tentative indications that the pace of domestic output growth might have slowed in the first quarter, it soon became clear that rapid domestic demand growth had continued and that the rate of increase in labour costs and prices was edging upwards. The current account deficit for the first quarter was revised upwards, to £2.8 billion, compared with a deficit of £1.6 billion in 1987 as a whole, and later figures showed no significant narrowing. In addition, money and credit were expanding rapidly. Lending by banks and building societies was exceptionally strong, in particular to the personal sector for mortgage finance. The growth rate of M0 increased.
Operation of monetary policy