Annual Report and Accounts 1967
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BANK OF ENGLAND REPORT FOR THE YEAR ENDED 28th FEBRUARY 1967 Issue(! by Order of the Court of Directors. 6th Juty 1967 Court of Directors 28th February 1967 Sir Leslie Kenneth O'Brien, G.B.E., Governor Sir Maurice Henry Parsons, Deputy Governor William Maurice Allen, Esq. James Vincent Bailey, Esq. Sir George Lewis French Bolton, K.C.M.G. Sir William John Carron Jasper Quintus Hollom, Esq. William Johnston Keswick, Esq. The Rt. Hon. Lord Kindersley, C.BE., M.C. Cecil Harmsworth King, Esq. Sir John Maurice Laing Christopher Jeremy Morse, Esq. The Rt. Hon. Lord Nelson of Stafford Sir William Henry Pilkington The Rt. Hon. Lord Robens of Woldingham, P.C. Michael James Babington Smith, Esq., C.B.E. Sir Henry Wilson Smith, K.C.B., K.B.E. Sir Ronald George Thornton On 1st July 1966 Sir Leslie O'Brien succeeded the Earl of Cromer as Governor and Sir Maurice Parsons succeeded Sir Leslie O'Brien as Deputy Governor. each for a period of five years. On the same date Mr. J. Q. Hollom was appointed to the Court for the remainder of Sir Maurice Parsons' term of office as a Director. namely until 28th February 1969. The tenn of office of Lord Kindersley expi red on 28th February 1967 and Mr. G. W. H. Richardson was appointed in his place for a period of four years. The terms of office of Mr. W. J. Keswick, Lord Nelson of Stafford and Sir William Carron also expired on 28th February 1967 and they were reappointed for a period of fout years. Bank of England Report for the year ended 28th February 1967 The fi rst part of this Report discusses the main monetary IJeve/opments during the year, most of which have already been reported more fully ill the Bank's Quarterly Bulletins. The second part, which begins on page 13 with the Bank of England Return for 28th February 1967, deals with some particular aspects of the Bank's work. The first half of the year was dominated by modest cost to the reserves. The uneasy tone in the difficult situation in the foreign exchange the foreign exchange market persisted during market. Sterling weakened under the pressure of April and the firs t half of May, and the spot a series of unsettling inftuences- the impending rate continued to fal l, but sales of sterling were general election at the end of March, events never very heavy. They increased, however, in Rhodesia, and finally the seamen's strike, later in May- after the seamen's strike bad which renewed doubts about the prospects for begun. the balance of payments. The situation was The market improved a little after the middle aggravated by tight money conditions and high of June, following the announcement that new interest rates overseas. Moreover, there was international credit facilities had been made growi ng unease abroad about the rise in incomes available to the United Kingdom; these facilities and prices and the level of aggregate demand, were related mainly to fluctuations in overseas and their implications fo r the balance of pay countries' sterling balances, and were thus ments. In July there was an acute crisis of specifically designed to counter the strains to confidence in sterling, and st rong measures were which sterling is subject as a reserve and inter taken by the Government. national trading currency. The spot rate, which After these measures, the second half of the had fallen earlier in the month to $2·78H, year saw a radical change. By February 1967, recovered to above $2·79. But the recovery the balance of payments showed a marked was short-Jived. Interest rates overseas were improvement, and there had been a significant rising, and money was very tight both on the easing in the pressure of demand. Interest rates, Continent and in the United States. American both at home and overseas, had declined sub banks were bidding strongly for curo-dollars, stantially from the peaks that they had reached and a further substantial amount of foreign in the late summer. The gilt-edged market was currency deposits, previously employed by very firm and active. Confidence in sterling had London banks in sterling, was switched back greatly recovered. into foreign currency--continuing the move ment that had begun in the second quarter of 1965. The demand for dollars contributed to The external situation the heavy pressure on sterling. Between tbe Foreign exchange Demand for sterling, which end of March and the end of June 1966 the market had been strong in the reserves fell by £ 106 million, after the equiva mOnths after September 1965, slackened in lent of £45 million had been acquired through February 1966. At the cnd of February the spot swaps with the V.S. authorities. rate for V.S. dollars fell below $2·80 for the July was a very bad month. Money abroad first time since the previous September. During was still very tight. But tbe main reason for March it was allowed to fall further, the sterling's weakness lay in continued doubts pressure to sell sterling being contained at only about the domestic economy and the prospects for the balance of payments. There was fre sh facilities totalled the equivalent of £463 million: talk about the possibility of devaluation. The a comparatively small amount of drawings pressure against sterling was at its highest which were linked specifically to changes in between 14th July, when Bank rate was overseas countries' sterling balances- under increased from 6% to 7% and there was an the facilities arranged in June 1966, which were accompanying call for Special Deposits,uJ and of a continuing nature-remained outstanding. 20th July, when the Prime Minister announced In the same six months, the Exchange Equali further measures. described later, to reduce sation Account's oversold forward position domestic demand and to cut back spending with the market was very substantially reduced. abroad. Substantial support, both spot and for In addition. the reserves increased by £35 roil· ward, was given to the market. lion; they rose in each month except December. The pressure then eased, but the market when there was a payment of £69 million of remained uncertain, partly because of doubts principal and interest on the North American as to whether the standstill on incomes, included loans. The spot rate rose to $2·79i. in the Government's measures, would succeed. Dollars were st ill in demand and from time to Gold Private demand for gold, time there were renewed sales of sterling. On whicb had been moderate in tbe early part of 13th September it was announced that. in order 1966. became very heavy in July, as the to provide a broader margin of safety for the nervousness in the exchange market became stability of the world monetary system, swap widespread, and towards the end of July the arrangements between the Federal Reserve dollar equivalent of tbe daily fixing price bad System and other central banks (including the risen to $35' 18i per fine ounce. Later in the Bank of England) had been increased. while the year it rose a little higher: demand was par· Bank of England had also arranged additional ticularly strong just before and during the facilities with other central banks. There was annual meeting of the International Monetary then some demand for sterling: conditions in Fund in September, and again in December, the euro-dollar market had eased a little and it when it was stimulated by uncertainties over became apparent that sterling itself was in short Rhodesia. political troubles in the Middle East. supply. By the end of the month, it seemed too and end-year influences. Just before Christmas that pressures at home were beginning to ease. the price touched $35·19t. Purchases of gold The undertone in the foreign exchange market by the market continued to be heavy on became stronger. occasions during January and February 1967. In the twO months of July and August there and the price was again above $35' 19 at times. were very substantial drawings on central bank In March the price eased, as low as $3H4!. facilities. although the reserves still fell. During before increased demand brought it back to September new drawings and repayments under $35' 18 at the end of tbe month. these facilities cancelled out; and, for the first time since early in the year, the reserves rose. by £3 million. Balance of There was a further sub· Sterling remained steady during the rest of payments stantial improvement in the 1966 and strengthened considerably during the balance of payments during 1966. The deficit first quarter of 1967. An important reason for on current and long-term capital account was the improvement after the turn of the year was £ 187 million, compared with £357 million in the sharp decline in interest rates overseas, and 1965 and £763 minion in 1964. The surplus in the slackening in demand for eure-dollars. At the last quarter. of £128 million. was the best the sa me time, the outlook for the balance of result in any quarter since 1959: althougb it payments seemed bopeful; and at home. owed much to special factors. it also reflected resources were less strained and the sta ndstill a stronger trend. Imports fell sharply. influenced on prices and incomes was working well. During no doubt by the removal of tbe import sur the six months to the end of March 1967. charge at the end of November but part~y repayments of earlier drawings on central bank reflecting the deflationary measures taken III (IJ 1 % from the London clearing banks and t % from the Scottish banks.