Summary of Quarterly Bulletin
Summer 2001

The Bank of England inflation attitudes survey
(57k)
As part of a new regular series, the market research agency NOP undertook a survey of public attitudes to inflation for the Bank of England in February. The results show that, given a choice between higher interest rates or higher inflation, four times as many people would prefer interest rates to go up, rather than prices. Other results suggest that most people are aware that the Bank, rather than the Government, now sets interest rates. 55% are satisfied with the way the Bank is doing its job; just 10% are dissatisfied. Most people are aware that inflation is low, but only one in three knows that it is currently between 1% and 3%. However, very few expect inflation to rise sharply in the year ahead.

The London Foreign Exchange Joint Standing Committee: a review of 2000 (46k)
The London Foreign Exchange Joint Standing Committee was established in 1973 under the auspices of the Bank of England, largely as a forum for the different participants in the foreign exchange market to discuss issues of common concern.

The Committee met seven times in 2000. The Committee's key focus during the year was its work on the London Code of Conduct for non-investment products, in conjunction with its sister committees in the London gold and sterling deposit markets. There have also been discussions on other issues such as e-commerce, liquidity and the Continuous Linked Settlement Bank.

Over-the-counter interest rate options (96k)
(By Richhild Moessner of the Bank's Gilt-edged and Money Markets Division).
The Bank of England's Monetary Policy Committee uses market expectations of future interest rates to inform its policy decisions. Interest rate expectations can be inferred from a range of financial instruments, including interest rate options. This article surveys the structure and use of the over-the-counter (OTC) interest rate option market. It discusses what information OTC interest rate options may contain about market interest rate expectations, additional to that available from products traded on exchanges. It also considers the linkages between OTC interest rate option markets and the markets in the underlying assets.

Research work published by the Bank is intended to contribute to debate, and does not necessarily reflect the views of the Bank or of MPC members.

Explaining the difference between the growth of M4 deposits and M4 lending: implications of recent developments in public finances (74k)
(By John Power and Peter Andrews of the Bank's Monetary Assessment and Strategy Division).
The growth of sterling lending by UK monetary financial institutions to the UK private sector has substantially exceeded the growth of UK private sector sterling deposits over the past two years. This article considers the possible influence on this growth differential of two events in the past financial year: the unexpected extent of the Government's cash surplus; and the assumption by the Debt Management Office of responsibility for government cash management. The article also describes how the gap between sterling lending and deposits was financed over the past two years.

Although monetary aggregates are no longer officially targeted for monetary policy purposes, analysis of these quantities plays an important role in the Bank's regular assessment of the outlook for inflation.

In its regular monetary policy analysis, the Bank primarily examines the banking sector's sterling liabilities and assets with the UK private sector. These quantities, known as M4 deposits (M4) and M4 lending (M4L) respectively, constitute a sub-section of the banking sector's overall balance sheet. The Bank focuses on M4 and M4L in particular (rather than the overall levels of banking sector deposits and lending) because, given that these quantities are country and currency-specific, they would be expected to relate closely to UK economic activity.

The first section of this article sets out the formal definition of M4 and its accounting relationship with the banking sector's balance sheet counterparts. The second section outlines how the new government cash management arrangements could affect the monetary statistics. The third section details the Government's cash surplus in 2000/01 and its monetary implications. The fourth section accounts for the difference between M4 and M4L growth in 2000/01.

Using surveys of investment intentions (79k)
(By Jens Larsen of the Bank's Monetary Assessment and Strategy Division and Rain Newton-Smith of the Bank's Structural Economic Analysis Division).
'Business investment' is an important component of aggregate demand, accounting for around 14% of GDP in 2000. But, business investment is volatile; and it is difficult to predict its quarterly growth path. So any extra evidence that can be brought to bear is potentially valuable. Surveys, which provide a direct and timely indication of firms' investment intentions, are one potential source of such evidence.

This article examines the information that surveys of investment intentions can provide about the future growth of business investment in the UK economy. The first section looks at the components of business investment in detail. The second section outlines the main economic determinants of investment growth. The third section explores surveys of investment intentions, and describes a model of investment that uses these surveys. The fourth section examines the forecast performance of this survey model, and finds that the model provides a useful source of additional information about future business investment.

Can differences in industrial structure explain divergences in regional economic growth? (74k)
(By Beverley Morris of the Bank's Conjunctural Assessment and Projections Division).
The Bank of England has a responsibility to monitor regional and sectoral information for the purposes of formulating monetary policy. Examining the differences in economic activity between the regions can improve understanding of the nature of economic cycles, and of the transmission of policy changes through the national economy.

During the early to mid-1990s, the pace of economic growth in the South was broadly comparable with that in the rest of the United Kingdom. During 1996–98, however, the pace of activity in the South strengthened considerably relative to the rest of the country. This article investigates one possible explanation for divergences in growth between the two regions—namely differences in the relative importance of the manufacturing and service sectors. The results suggest that such differences in industrial structure do not account for the majority of the regional divergences in growth. Rather, it appears that they are explained mostly by a pick-up in population growth and stronger service sector activity in the South relative to that in the rest of the country over the period.

Has there been a structural improvement in US productivity? (85k)
(By Stuart Berry of the Bank's International Economic Analysis Division and David England of the Bank's Monetary Assessment and Strategy Division).
Annual labour productivity growth in the United States has averaged 2.8% a year since 1996, compared with an average rate of 1.6% during the preceding 25 years. This marked increase in productivity growth has been a key component of what many commentators have suggested is a 'new economy'. Given the US slowdown since the second half of 2000, a key question is the extent to which these gains reflect structural improvements, rather than cyclical factors. The evidence so far points towards a large role for structural improvements in productivity. If these gains prove to be more cyclical, however, this would have important implications for corporate performance, financial markets and, ultimately, output and inflation.