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Introduction.

The U.K. government suspended its participation in the European Exchange Rate Mechanism (ERM) on 16 September 1992, following turmoil in foreign exchange markets. The decision to withdraw from the ERM and to float sterling was taken against the background of the longest U.K. recession in post-war history. Although the conditions for modest recovery have been present for some time, the up-turn was stalled by household attempts to reduce high debt levels. Fears that higher U.K. interest rates would be needed to defend sterling damped domestic confidence, protracted the recession and thereby exacerbated the government's fiscal position. In the event, market perceptions grew that sterling's ERM parity was unsustainable and that monetary policy was tighter than required by the needs of the domestic economy.

Following such a significant shift in monetary policy regimes, the economic outlook necessarily remains uncertain. However, the significant easing of monetary conditions - lower interest and exchange rates - will give a boost to economic activity. A slow recovery in output is now projected in the first half of 1993, gradually gathering momentum thereafter. Unemployment is likely to remain high, but decline in 1994. The government has reiterated its commitment to attaining and keeping inflation low. On the assumption that the overall stance of macroeconomic policies remains tight over the coming two years, the underlying process of disinflation is projected to continue, although the effects of the currency depreciation will be reflected in price levels.

Part I of this Survey examines the current economic situation and short-term prospects. Part II discusses macroeconomic policy settings, while Part III of the Survey reviews recent progress in structural reform, as well as areas warranting further attention. The state of the United Kingdom's environment and policy initiatives are reviewed in Part IV, along with the need to make greater use of economic incentives to improve the environment. Policy conclusions are presented in Part V.

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Title Annotation:U.K. suspends participation in European Exchange Rate Mechanism
Publication:OECD Economic Surveys - United Kingdom
Date:Jan 1, 1993
Words:314
Previous Article:Calendar of main economic events.
Next Article:Economic developments and prospects.
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