Operation of monetary policy

• The evidence about the United Kingdom’s economic performance remained favourable in the first quarter. Current retail price inflation increased slightly, but this was in line with the projection in the Bank’s February Inflation Report.
• There were some indications that growth was slowing towards a more sustainable pace, but surveys continued to suggest a buoyant picture for the months ahead.
• At his meeting with the Governor on 2 February, the Chancellor decided to raise official interest rates by 1/2% to 63/4% to help keep inflation under control. The increase was well received in the financial markets and implied forward interest rates declined steadily over the following weeks.
• Foreign exchange markets suffered disturbance throughout the quarter—and especially in early March, when sustained selling of the dollar and buying of the Deutsche Mark and yen gathered pace. Sterling was drawn into the disturbance in March and depreciated in the first half of the month. Domestic markets, however, showed little reaction and remained calm.
• International bond markets recovered some ground in the quarter and sufficient gilt sales were made to achieve full funding against the Budget PSBR forecast. The Government published its funding remit to the Bank for 1995/96.

Operation of monetary policy