Commentary

In July, the latest of the three months reviewed by this Commentary, sterling became a little stronger as the United Kingdom's prospects appeared to improve; and foreign exchange markets - which earlier had been beset by fresh anxieties about the stability of the international monetary system - grew calmer as the economic and political disturbances in France died away.

The first encouraging news came towards the end of June, when the U.S. Congress finally approved the surcharge on income taxes, combined with SUbstantial cuts in Federal expenditure; the belief was that this would ease pressures in the U.S. domestic economy, leading to lower interest rates and a smaller U.S. balance of payments deficit. Soon afterwards, balance of payments and other measures were taken in France which seemed to rule out any immediate devaluation of the franc. On 8th July it was disclosed that central bankers, meeting in Basle, had agreed in principle to a medium-term credit facility for the United Kingdom to offset fluctuations in the sterling balances of sterling area countries. The U.K. trade figures for June which were announced a few days later - though still showing a large deficit - werebetter than for some months past. By the end of July sterling, both spot and forward, had become appreciably stronger and there was some evidence that very short-term funds were moving to London.

Short-term interest rates abroad tended to rise at the beginning of the second quarter, and with credit in the United  States tight, and American banks borrowing dollars heavily through their London offices, euro-dollar and U.S. Treasury bill rates reached peaks towards the end of May. Some shortterm interest rates eased in June and in July they, including those in the United Kingdom, generally began to fall. Domestic activity in the United Kingdom seems to have risen rather less in the second quarter than in the first, mainly because personal spending was not as high as it had been before the Budget.

Commentary