It was apparent from early 1997 that overall demand and output growth in the UK economy needed to moderate if we were to avoid capacity constraints and a rise in inflation. That was the background to the tightening of monetary policy which continued through the middle of 1998. Throughout that period we were acutely conscious that the strength of sterling — for reasons that were never entirely clear — was already creating difficult trading conditions for the internationally exposed sectors of the economy. And we allowed for that in our projections of overall demand pressure. But right up to last summer there was evidence of increasing tightness in the labour market, reflected in increasing skills shortages and recruitment difficulties, in the employment and unemployment data and in gradually rising pay settlements as well as in the available earnings data. So, if we were to adhere to the government's inflation target, we could not avoid tightening monetary policy to moderate the growth of domestic demand, even though we recognised that this would be likely to increase the pressure on those exposed sectors.
June 30 1999
