Operation of monetary policy

This article covers the three months from October to December 1989.

During the period under review the adjustment of the domestic real economy to the tightening of monetary policy which began in the middle of 1988 continued. However, for much of this period the adjustment was overshadowed in financial markets by UK domestic political uncertainties and, to a greater extent, by the deutschemark's strength, propelled by the extraordinary developments in Eastern Europe. The resultant fall in the sterling/deutschemark rate was perceived by some commentators as a more general weakness in the UK currency and, with the authorities leaving the level of interest rates unchanged at 15% after the rise on 5 October, there was speculation that the commitment to a firm exchange rate had weakened. But the decline in sterling in the early part of the quarter was seen by the authorities as temporary, and over the period as a whole sterling was steady against both the dollar and the yen. With the domestic economic adjustment on course, an immediate further tightening of policy was unnecessary.

Operation of monetary policy