Operation of monetary policy

Quarterly Bulletin 1989 Q4
Published on 01 December 1989

Financial confidence, which had been weak in June, strengthened in July under the influen ce of international developments and eviden ce that the adjustment of the domesti c economy was pro ceeding satisfactorily. However it again weakened sharply in September amid growing market expectations of a rise in German interest rates and market co ncern about the emerging domestic indicators . When interest rates in continental Europe were increased early in October, there was no option for the United Kingdom but to follow, and the general level of interest rates was in creased by a fu rther 1 % to 15%.

During June, the dollar had been strong against all currencies, in cluding the pound, and there had been a widespread expectation that interest rates in continental Europe would rise, which in the event they did, on 29 June, by 1%. Moreover, there had been some doubts in financial markets about the pace of adjustment of the UK economy to the progressive tightening of monetary policy over the preceding year. These developments had provoked recurrent bouts of market pressure for a lower exchange rate and higher interest rates, whi ch the authorities had resisted.

PDFOperation of monetary policy


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