Conclusion

The challenge for UK monetary policy in the 1990s lies in maintaining control of domestic monetary conditions within the context of UK membership of Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). ERM membership will almost certainly take place in the early 1990s as the UK fulfils the commitment made at the June 1989 Madrid Summit. Of the three factors influencing the timing of entry, the requirement for a lower inflation rate in the UK relative to mat in existing ERM member countries will be the most difficult to achieve. After falling close to the German inflation rate in the mid-1980s, the UK rate rose sharply in the latter part of the decade and the first half of 1990: the differential should narrow sufficiently in 1991 and 1992 for ERM membership to be acceptable to the UK authorities. Arguments that the UK should join the ERM, even with a relatively high inflation rate, in the hope that membership would help to reduce inflation do not seem to be well founded. Econometric work suggests it is easier to bring down inflation whilst outside the ERM; and there is no reason why ERM membership per se would reduce it. The other two conditions the UK has attached to ERM membership will be easier to achieve. Substantial progress has already been made in removing exchange controls in other EC countries, with Belgium, France and Italy removing their controls ahead of the timetable set out in the Delors plan; and a greater degree of convergence between the cyclical positions of the UK and other EC countries should be achieved in the early 1990s.