Summary of Quarterly Bulletin
February 1998

Research work published by the Bank is intended to contribute to debate, and is not necessarily a statement of Bank policy.

The Inflation Report projections: understanding the fan chart (354k)
(by Erik Britton, Paul Fisher and John Whitley of the Bank's Conjunctural Assessment and Projections Division).
Since February 1996, the Bank's inflation forecast has been published in the form of a probability distribution - presented in what is now known as 'the fan chart'. This article discusses the motivation for the change, describes how the chart is produced and explains how it reflects the forecast process.

Investment in this recovery: an assessment (88k)
(by Simon Whitaker, of the Bank's Structural Economic Analysis Division).
Investment has grown less rapidly in this recovery than during the previous one, despite a relatively low user cost of capital, high levels of profitability and high stock market valuations of capital. Part of the reason may have been that firms were correcting for over-optimistic forecasts of demand in the late 1980s. Another possibility is that conventional measures of investment do not capture additions to the productive potential of the economy as accurately as they once did.

Macroeconomic policy and economic performance in developing countries (36k)
(by Maxwell Fry, Director of the Bank's Centre for Central Banking Studies).
In this article, Maxwell Fry, who became Director of the Bank's Centre for Central Banking Studies (CCBS) in September 1997, examines the relationship between monetary and fiscal policies for a sample of 70 developing countries. He finds that the size of the government's deficit and the methods by which it is financed determine monetary policy reactions to increases in both government credit and net foreign assets. In particular, Maxwell Fry finds that larger deficits and greater reliance by governments on the domestic banking system are associated with more accommodating monetary policies. In turn, such inflationary macroeconomic policies are associated not only with higher inflation, but also with lower economic growth.

Gilt-edged and sterling money markets: developments in 1997 (143k)
This article reviews developments in the gilt-edged and sterling money markets during 1997. There have been significant changes in these markets, as a result of both official and private sector initiatives and external developments. The economic backdrop was propitious, with economic growth sustained in the United Kingdom for the fifth successive year, and inflation remaining low. Bond yields fell, by more in the United Kingdom than in many other countries. In Europe, the prospect of EMU came into sharper focus, with implications both for market yields and trading arrangements. The Bank introduced reforms to its sterling money-market operations in March, widening the range of counterparties with whom the Bank would deal, and including gilt repo as a regular instrument in the Bank's open market operations. As a corollary, the Bank's counterparties in the gilt market, the gilt-edged market makers, were no longer required to be separately capitalised or specially supervised. Later in the year, the upgrading of the Central Gilts Office service at the Bank was completed, enabling the start of gilt strips trading. Looking ahead, work is under way to set up the UK Debt Management Office, which will assume responsibility for the Government's debt management from April 1998; changes to bring the sterling markets closer into line with the prospective euro markets are planned for 1998; and, following the introduction of index-linked auctions in the United States, HM Treasury is consulting the UK market about a similar initiative here.

Upgrading the Central Gilts Office (55k)
(by Christopher P Mann of the Bank's Market Services Division and Controller of the CGO Project).
The Central Gilts Office system, first introduced in 1986, was designed and built to meet basic market demands: the provision of settlement for gilt-edged securities through an efficient and secure system of electronic book-entry delivery of stock in real time against an assured payment. By 1994, it had become apparent that the system needed to be upgraded to reflect continuing improvements in information technology (especially in data security) and developments in market practices, as well as structural reforms in the gilt market and payments systems and the possibility of UK membership of European Monetary Union. This article explains the background to the decision taken in 1995 to upgrade the system, describes the process involved and sets out some of the features and changes introduced by the upgraded system.