Operation of monetary policy

• Figures published in the third quarter showed that inflation continued to moderate, but there were some signs of increasing cost and price pressures in the pipeline.
• Economic activity had been strengthening, here and abroad: in the second quarter, UK GDP was shown to be growing well above trend, and the margin of spare capacity in the economy to be smaller than previously thought, though there were indications of a moderation in growth in later data.
• Following his early September meeting with the Governor, the Chancellor decided on 9 September that official interest rates should be raised by 1/2%; the change was implemented by the Bank on 12 September.
• The move was immediately welcomed by the financial markets as a clear signal of the authorities’ commitment to counter inflation. Sterling strengthened and long-term bond yields fell.
• The exchange rate strength continued up to and beyond the end of the quarter, but UK bond yields rose again as international bond markets weakened.

Operation of monetary policy