Operation of monetary policy

This article covers the three months from July to September 1988.

Monetary conditions were tightened during the period in order to exert firm downward pressure on inflation and domestic demand growth. Domestic interest rates were increased by a further two and a half percentage points, taking banks' base rates to 12%, while sterling ended the period at a slightly higher effective rate than at the end of June.

Domestic interest rates had been increased four times during June, on each occasion following a weakening of sterling, thus tightening monetary conditions without provoking an over-reaction in the foreign exchange market. At the beginning of July a continuation of this process was necessary. Domestic demand was continuing to grow rapidly and to outpace even the exceptionally encouraging response of the supply side of the economy; money and credit aggregates were accelerating; and the twelve-month rates of increase in both retail prices and other earnings and prices indices were tending to edge upwards.

Operation of monetary policy