§ Monetary policy will continue to play a central role in our attack on inflation. The money supply figures for banking March will not be published until Thursday, but I think it right on this occasion to tell the House in advance that sterling M3 grew in March by only ½ per cent. and M1 slightly less. This confirms that the trend of monetary growth has come back into the desired range, as I predicted it would after the exceptional but expected jump in January. The figure for 1977–78 as a whole will probably be just above the 9 per cent. to 13 per cent. range but under 14 per cent. But this was a year in which the money supply in Britain, as in Germany, was substantially increased by inflows of foreign currency—a factor which we took action to correct last October.
§ For the coming year, 1978–79, I intend to continue using monetary targets, with certain changes. Over the last year, as we have moved into surplus on our balance of payments, greater attention has rightly focussed on sterling M3, the wider measure of money supply, rather than DCE—domestic credit expansion. It is right to recognise this by making a target range for sterling M3 the focus of our monetary policy.
§ I also intend to adopt a system of rolling targets, in which the target is rolled forward once every six months. This will enable me regularly to reassess progress on the monetary front in relation to developments in the rest of the economy and either to continue with the existing target range or to modify it. For example, if events have moved as I would hope on 1192 counter-inflation policy, it would be appropriate to consider in the autumn whether to lower the target range.
§ The target range for sterling M3 for 1978–79 will be 8 per cent. to 12 per cent. The corresponding level of DCE will be below the £6 billion which was set out in the Letter of Intent I wrote to the International Monetary Fund in 1976. This will provide both for a reduction in the rate of inflation and for an increase in economic growth. It should provide ample room for the likely increase in bank lending to industry.
§ In Britain, as elsewhere, the rate of growth of the money supply is bound to fluctuate significantly from month to month. As last year, it is likely to be significantly above or below the desired range from time to time. In so far as it is possible now to identify the sort of factors which may cause such fluctuations, I would expect the growth to be higher at some stages in the first half of the year than in the year as a whole. In particular, the timing of central Government receipts and payments may cause jumps in certain months such as banking May similar to that which we had in January this year.
§ I will, of course, use whatever instruments of monetary policy are appropriate as the year proceeds. I would hope that gilt-edged interest rates will fall later in the year as it becomes clear that we are making further progress in the fight against inflation. At the moment, however, sterling short-term interest rates are on the low side, both in relation to controlling the domestic money supply and by comparison with United States and Eurodollar rates, given recent developments in the exchange markets.
§ With my approval, therefore, the Bank of England is this afternoon raising its minimum lending rate from 6½ per cent. to 7½ per cent.—far below the level that I inherited four years ago.