The Budget embodies many of the recommendations that we have put forward over the last year-on personal savings and the appropriate stance of macro-economic policy- but a void remains on the key issue of Exchange Rate Mechanism (ERM) entry. With inflation set to rise above 9 percent in the short term, there is a danger that an infaltion/sterling depreciation cycle becomes entrenched. In fiscal terms, the Budget was broadly neutral and the Chancellor confirmed that the strategy is to rely on high interest rates to support the exchange rate and tame inflation. This year, with base rates of 15 per cent, we expect the pount to remain reasonably stable, but in 1991-92, as interest rates fall-which they are bound to do ahead of the election-the pound could well come under pressure, so putting the Government's inflation objectives at risk. ERM entry would provide the obvious support and is consistent with the Treasury forecast. Without it, inflation is unlikely to fall below 5 per cent next year.
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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.
Volume (Year): 11 (1990) Issue (Month): 2 (August) Pages: 18-26 Download reference. The following formats are available: HTML
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Handle: RePEc:ifs:fistud:v:11:y:1990:i:2:p:18-26
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