This article covers the post-election period to end-June 1992. Much of the uncertainty over the future course of fiscal and monetary policy which had built up ahead of the general election was removed by the result, and this was reflected in the immediate post-election behaviour of financial markets. But uncertainty still remained over the timing and strength of economic recovery .
Although measured consumer and business confidence rose in the spring, the available evidence on consumer spending and on housing market activity, including that from the monetary aggregates, suggested that any revival in demand soon after the election did little more than offset the fall which had occurred beforehand. Consumption remained depressed by falling asset values and still-high levels of debt and debt service. Although the headline rate of retail price inflation and the growth of average earnings appeared to remain stubbornly high, data on producer prices, input costs and the level of pay settlements indicated that underlying inflation was still falling. Accordingly, the case on domestic grounds for a further reduction of interest rates was clearly established and, as sterling maintained its post-election gains in the ERM, so the Bank was able to signal a further ½% reduction in short-term interest rates in early May.
The response of the gilt-edged and money markets to the Danish electorate's unexpected rejection of the Maastricht Treaty in June was muted, in contrast to that in some other ERM countries. This demonstrated the markets' belief that the UK authorities were firmly committed to a counterin flationary policy which did not depend on any move towards monetary union. But, as longer-term prospects for a single currency became more uncertain and the deutschmark strengthened, the scope for a further narrowing of the short-term interest rate differential with Germany was reduced.
In its gilt-edged operations, the Bank took advantage of strong market conditions after the election, to make very significant inroads into the prospective funding needs for the year as a whole. Gross official sales worth £15.2 billion were secured during the quarter while conventional yields retained their downward trend and index-linked yields also fell.
Operation of monetary policy