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Bank of England Quarterly Bulletin May 1998

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Bank of England Quarterly Bulletin May 1998 Bank of England Quarterly Bulletin May 1998 Volume 38 Number 2 Bank of England Quarterly Bulletin May 1998 Summary 91 The Bank of England Act 93 Recent economic and financial developments Markets and operations 101 Box on European short-term rates 104 Box on the Government’s financing requirement and Remit to the Debt Management Office for 1998/99 116 The international environment 123 Box on US consumer prices 128 Note on developments in East Asia 133 Recent developments in financial markets 136 Research and analysis Growth in UK manufacturing between 1970–92 145 Competition and co-operation: developments in cross-border securities settlement and derivatives clearing 158 Box on links between exchange-traded derivatives clearing houses 161 Box on ECSDA proposed model for CSD-to-CSD links 163 Report The financing and information needs of smaller exporters 166 Speeches The New Lady of Threadneedle Street Lecture by the Governor on 24 February at the Manchester Business School 173 Exchange rates: an intractable aspect of monetary policy Speech by the Governor on 1 April at the annual Roy Bridge Memorial Lecture 178 Volume 38 Number 2 Printed by Park Communications © Bank of England 1998 ISSN 0005-5166 The Quarterly Bulletin and Inflation Report Inflation Report The Inflation Report reviews developments in the UK economy and assesses the outlook for (published separately) UK inflation over the next two years or so in relation to the inflation target. The Report starts with a short overview section, while the second investigates money, credit, and financial market data, including the exchange rate, and the following three sections examine demand and output, the labour market and pricing behaviour respectively. The concluding sections present an assessment of medium-term inflation prospects and risks, and information about non-Bank forecasts. The Bank of England Act In this article, Peter Rodgers, Secretary of the Bank of England, outlines the main provisions (pages 93–99) of the Bank of England Act, which gives legislative force to the major changes to the Bank’s structure, powers and responsibilities announced by the Chancellor of the Exchequer in May 1997. Markets and operations After the volatility of the final quarter of 1997, markets were generally more stable in the (pages 101–22) first quarter of this year. Equity markets in the major countries rose to new highs during March. Bond markets in the major countries, which had benefited in 1997 Q4 as investors sought the security of highly-rated government paper, gave up only a little ground in 1998 Q1. Foreign exchange markets were also active in the first quarter of 1998, with sterling rising to its highest against the Deutsche Mark since May 1989. Official interest rates were unchanged in most of the major industrialised countries, including the United Kingdom. The international This article discusses developments in the international environment since the February environment 1998 Quarterly Bulletin. The main news is: the financial and economic situation in Asia (pages 123–35) now appears more stable. Signs of contagion in other emerging markets have diminished. Growth in the United States slowed slightly in the final quarter of 1997. The Japanese economy has continued to slow, and Japanese output fell slightly. The recovery in Germany and France has continued, though growth slowed in Germany. Domestic demand continued to strengthen in France, but not in Germany. Equity prices in most major markets have continued to rise. After strengthening in January 1998, Japanese equity prices remained in a narrow range during February and March, but fell slightly in early April. Inflation has remained low throughout the major six (M6) overseas economies. EU countries have released their fiscal debt and deficit figures for 1997. Based on these, the European Commission and European Monetary Institute recommended that eleven countries were eligible for membership of monetary union. The European Council decided to admit these countries to monetary union from 1 January 1999. Official interest rates have remained unchanged in most industrial countries. Bond yields remained at low levels. Recent developments in This article, by David Collins of the Bank’s Markets and Trading Systems Division, financial markets discusses major trends in the financial markets during the past 18 months, focusing in (pages 136–44) particular on the impact of the problems in East Asia, EMU-related issues and the growth of electronic trading. 91 Bank of England Quarterly Bulletin: May 1998 Research and analysis Research work published by the Bank is intended to contribute to debate, and is not (pages 145–65) necessarily a statement of Bank policy. Growth in UK manufacturing between 1970–92 (by Gavin Cameron of Nuffield College, Oxford, James Proudman of the Bank’s Monetary Instruments and Markets Division, and Stephen Redding of New College, Oxford and CEPR). This article examines productivity growth and levels in UK manufacturing between 1970–92. During this period, UK manufacturing output fell, but by less than the number of hours worked in manufacturing, and so labour productivity increased. Within manufacturing, economic performance varied considerably, both across sectors and time, including a notable difference between the two peak-to-peak business cycles 1973–79 and 1979–89. To understand manufacturing economic performance more fully, the article considers disaggregated data for 19 manufacturing industries, using two measures of productivity: labour productivity and Total Factor Productivity. Competition and co-operation: developments in cross-border securities settlement and derivatives clearing (by Bob Hills and Chris Young of the Bank’s Payment and Settlement Policy Division). European securities settlement systems and derivatives clearing houses are preparing for EMU by offering members clearing and settlement services in foreign as well as domestic instruments. This article outlines recent developments and new initiatives in cross-border securities settlement and derivatives clearing. It suggests that competition for post-EMU business is already resulting in increased co-operation, in the form of links between systems. These developments have implications for the risks in cross-border clearing and settlement and for market structure, and raise issues for central banks and regulators. Report The financing and information needs of smaller exporters (by Stuart Cooper and Inke (pages 166–72) Nyborg of the Bank’s Business Finance Division). This article outlines the key structural issues facing smaller firms seeking to enter or remain in export markets. It finds that effective access to focused advice and information is the most important enduring issue facing smaller exporters, especially those new to exporting. Access to finance does not appear currently to be a major difficulty for firms with some experience of exporting, though they may not be fully aware of all the alternative sources of finance. There is also some evidence that smaller exporters are less active than larger exporters in taking steps to manage their foreign exposure, possibly making them more vulnerable to the risks arising from fluctuations in foreign exchange rates and the failure of foreign buyers. The final section of the article notes the likely impact of the single currency on smaller exporters. 92 The Bank of England Act In this article, Peter Rodgers, Secretary of the Bank of England, outlines the main provisions of the Bank of England Act, which gives legislative force to the major changes to the Bank’s structure, powers and responsibilities announced by the Chancellor of the Exchequer in May 1997.(1) The Bank of England Act received Royal Assent on However, the legislation does specify that the Treasury must 23 April 1998 and will come into force on 1 June 1998. It publish a statement on its price stability objective and on the provides a statutory basis for the functions of the Monetary Government’s economic policy within seven days of the Act Policy Committee (MPC), which was established as an coming into force, and thereafter at least once every twelve interim committee following an arrangement set out in a months. letter from the Chancellor to the Governor dated 6 May 1997.(2) The Act also transfers responsibility for the The Act establishes the MPC as a committee of the Bank, supervision and surveillance of banks from the Bank of and gives the Committee the responsibility for formulating England to the Financial Services Authority. The and implementing monetary policy. It also sets out the governance of the Bank itself is changed by the Act, which composition of the MPC, which will comprise the Governor reforms the constitution, composition and duties of Court, and two Deputy Governors of the Bank, two members the Bank’s Board of Directors. The Act makes new appointed by the Bank after consultation with the provisions relating to the funding, the accounts and the Chancellor, and four members appointed by the Chancellor. profits of the Bank, and the collection of monetary statistics Of the two members appointed by the Bank, one will be the by the Bank is backed by legislation for the first time. executive responsible for monetary analysis within the Bank, and the other the executive responsible for monetary The Monetary Policy Committee operations. A Treasury observer may attend meetings and speak, but not vote. The legislation says that the four In his letter to the Governor on 6 May last year, the external members appointed by the Chancellor (who become Chancellor said that all aspects of the new procedure for employees of the Bank) must have knowledge and making and announcing decisions on monetary policy would experience ‘relevant to the Committee’s functions’. operate de facto until the new Bank of England Act came into force. The Committee was therefore in a position to The Treasury is given reserve powers to give orders to the take its first decision on interest rates within a month of the Bank in the field of monetary policy, but the Act states that announcement that the Bank was to be given operational this is only if the Treasury is satisfied that they are required independence.
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