Abstract
We start our forecast this time with an exchange rate 9½ per cent higher in the third quarter of this year than we anticipated in May. The main reason for the appreciation of sterling was probably a reassessment by the market of the likely course of UK monetary policy over the next year or two. The likelihood of an early and significant fall in interest rates has receded, as forecasts of the underlying rate of inflation have been revised up. At the same time the commitment to join the exchange-rate mechanism has become firmer, and the Chancellor has been interpreted as wishing to ‘talk the rate up’.
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