§ However, if long-term improvements in economic performance are determined largely by the supply side, we have seen all too often in the past 20 years how short-term prospects can be blown off course by inflation. I am absolutely determined that this should not happen again.
§ The Government's objective is to keep the underlying rate of retail price inflation within the range of 1 to 4 per cent.; and to bring it down to the lower half of that range by the end of this Parliament. I expect underlying inflation to be 3¾ per cent. at the end of this year, close to the top of its target range, but inflation should fall further over the medium term. Monetary policy is set to meet that objective.
§ The detailed framework for monetary policy was set out in my letter to the Treasury and Civil Service Select Committee last autumn; and since then, I have introduced two further developments to demonstrate our determination to conduct monetary policy in a way that will deliver our inflation target. We now publish a monthly monetary report which shows the information that guides our decisions. I have also asked the Bank of England to provide regular reports on our progress towards meeting our inflation objective.
§ Interest rate decisions are based on a continuing assessment of monetary conditions, measured principally by the growth of narrow and broad money, and movements in the exchange rate and asset prices. Alongside the target for inflation, I am setting monitoring ranges for both the narrow and broad measures of the money supply; for the period of this Parliament the ranges are 0 to 4 per cent. for M0 and 3 to 9 per cent. for M4.
§ In judging the prospects for inflation, I have to weigh the evidence from all the indicators, taken together. If any one is out of line, it is particularly important to assess its significance against the performance of the others.
§ Following the recent substantial reduction in interest rates, M0 growth may be above its monitoring range in the period ahead, but, on the basis of the indicators taken together, I believe that interest rates at their current level are consistent with the achievement of the Government's inflation objectives. At the lowest level in the European Community, they are also fully consistent with the prospects for recovery this year.