Politics or Economics? UK Enters ERM
Politics or economics? UK enters ERM
The United Kingdom's entry into the exchange rate mechanism (ERM) of the European Monetary System (EMS) caught most industry watchers off guard Oct. 5.
"It hit us and the rest of the UK market absolutely by surprise," says Ifty Islam, an analyst with Barclays de Zoete Wedd. "We were more optimistic than several other houses, but we were looking for (ERM entry in) early December at the earliest."
Despite earlier statements that it was committed to join the ERM, UK officials continued to voice concerns about inflation up to the time of the announcement. The UK inflation rate had vaulted to above 10% this fall, well above the 4% average for EMS members and the nation's highest rate since February 1982.
Officials had said inflation would have to fall several percentage points before the pound could join the ERM.
The timing of ERM entry led to charges that it was politically rather than economically motivated.
Calling the move a brilliant political counterstroke, Bob Hinton, senior currency analyst with Harris Bank in New York, noted the announcement came on the last day of the opposition Labor Party's annual conference.
"How do you take their thunder away?" Hinton asked. "You zap them with a good ERM entry thing. Nobody should be surprised."
"The timing was purely political," contends Nick Parsons, an economist at London's Union Discount Bank. "The government has stolen the opposition's thunder."
UK officials pointed to signs of a recent slowdown in the economy as evidence that inflation was under control and soon would drop. Tight monetary policy was showing signs of paying off, and Chancellor of the Exchequer John Major spoke of "unambiguous signals" of a slowdown. …