Operation of monetary policy

• Figures published in the fourth quarter of 1994 showed a continuation of low current retail price inflation but developing inflationary pressures in the early and intermediate stages of production.
• Data also showed output continuing to grow faster than the productive capacity of the economy, reducing the margin of unused resources. The contrast between strong external demand and relatively subdued domestic demand became more pronounced.
• At his meeting with the Governor on 7 December, the Chancellor decided that official interest rates should be raised by 1/2% to 61/4%; the change was implemented immediately by the Bank to remove market uncertainty.
• Financial markets reacted positively to the move, appearing to view it as evidence of the authorities’ continuing commitment to price stability. Sterling strengthened and long-term bond yields fell.
• International bond markets were more stable in the fourth quarter. Gilts performed well in relation to other markets, and the required pace of funding was fully maintained.

Operation of monetary policy