This article covers the three months April-June 1989. During the period under review, economic indicators continued to show the economy adjusting following last year's tightening of monetary policy. But policy had to take account of market impatience with the pace of adjustment which, combined with the side-effects of the world-wide strength of the dollar, led to recurrent periods of downward pressure on the sterling exchange rate and upward pressure on sterling interest rates. In the middle of the period, such pressure on sterling led the authorities to raise interest rates by a further 1% to prevent the stance of policy from being undermined.
The shape of the adjustment to last year's policy tightening became clearer during the period under review. As had been expected, the main effect was on the personal sector, with the initial impact on the housing market The slowdown in house prices and in turnover has spread well out from the South East, and has now reached most parts of the country. Indeed house price levels have fallen recently in much of the South. Moreover, housing starts have been weak for the last three months. Consumer demand more generally has shown signs of slowing down: initially the main effect was on spending on durable goods, which was lower in the first quarter than in the third quarter of 1988; the growth rate of non-durable spending has also declined this year. Although retail sales have been volatile in recent months, the trend rate of growth has decreased significantly.
Operation of monetary policy