This article covers the three months from January to March 1990.
The economic and financial indicators released during the first quarter suggested that the real economy was continuing to respond to tight monetary policy, with the slackening in domestic demand spreading into the corporate sector as well as the personal sector, and with output growth subdued. On the other hand, developments in costs and prices suggested that the adjustment in inflation might be more protracted than had been hoped earlier. Indeed, the twelve-month growth rate of the RPI increased, partly on account of mortgage interest rates, and the prospect for the near term is for further increases on account of special influences such as the introduction of the community charge. Market concerns about inflation were partly responsible for the sharp fall in gilt prices in the quarter, although the worldwide weakness in bond markets was perhaps a greater influence. In the light of all the evidence, the authorities maintained the general level of interest rates at 15% throughout the period.
The focus of international financial developments during the quarter was largely away from sterling, concentrating on prospects in Eastern Europe, particularly on German economic and monetary union and the effect that would have on the conduct of German monetary policy. Official German short-term interest rates remained unchanged during the period, though bond yields rose by 1,1/8% at the 10-year maturity as worries about future inflation increased and as concerns grew about the likely fiscal costs of unification. In these circumstances, the deutschemark tended to weaken against other major currencies, including sterling. Weakness in the Japanese equity market and in the value of the yen had much less impact on the United Kingdom.
Operation of monetary policy