Operation of monetary policy

• During the second quarter, the Chancellor extended the Government’s inflation objective beyond the end of the current parliament: the aim is a rate of inflation—measured by the twelve-month change in the retail prices index excluding mortgage interest payments—of 21/2% or less.
• There were indications of significant cost pressures in the quarter, and there continued to be a marked contrast between domestic demand and the traded sector.
• Official interest rates remained unchanged during the quarter. The decision not to increase rates in May surprised the markets; initially, sterling fell to a new low on a trade-weighted basis and long-gilt yields rose, but market reaction subsequently steadied.
• The Government announced proposals for a new tax regime for gilts and other bonds, which are likely to facilitate the development of an official gilt strips market.

Operation of monetary policy