Example of
- In the late 80s, inflation in the UK was a problem; it was increasing above 10% following the Lawson Boom.
- Therefore, the government decided to join the ERM, a semi fixed exchange rate between UK and German D Mark.
- However, many now feel the UK entered at a rate which is too high.
- The high inflation made the UK less competitive reducing demand for sterling. Also as the economy was going into recession, Sterling became weaker. Investors were selling Pounds; Therefore, the government had to keep intervening to protect the value of the exchange rate. This involved buying pounds on the foreign exchange markets and increasing interest rates.
- However, because the economy was in recession, high interest rates made it worse. It led to record levels of home repossessions and house prices collapsed. On of 16 September 1992, the government tried raising interest rates to 15% in a last ditch attempt to save the value of the pound.
- But, the market correctly predicted the government was bluffing and could not keep interest rates that high. Speculators like George Soros made over £1 billion, selling pounds to the UK Government. People kept selling and at the end of the day the government gave into the inevitable and devalued the pound. This allowed interest rates to come down and the economy recovered.
- ERM at BBC
0 comments:
Post a Comment