Sushil Wadhwani says that, although there are good reasons why the markets re-rated sterling relative to the deutschmark, it is very difficult to justify the level, equivalent to around DM3.40, that was achieved in early May. He argues that sterling is still “overvalued” against the euro (equivalent to around DM3.14 at close of business 26 May), and that it should plausibly decline further over the coming years. However, since periods of persistent exchange rate overvaluation are costly, can cause macroeconomic instability, and can often endure for longer than expected, it makes sense to explore policy alternatives.
Published on
30 May 2000
Press release