This article covers the period from October to December 1991.
During the fourth quarter it became evident that, although the economy was no longer contracting, the more encouraging survey evidence published in the third quarter had not yet been translated into a sustained recovery in output or demand. The monetary data were consistent with this picture: while the rate of growth of M0 continued to rise, that of M4 continued to fall. The period of below-potential growth and reduced inflationary pressures had enabled short-term interest rates to be cut to within 100 basis points of German rates by the beginning of the fourth quarter, while sterling remained comfortably within the ERM. In the fourth quarter, however, as the rate of decline of the underlying measures of inflation slowed, it became clear that further policy easing would be dependent upon a further sustainable reduction in inflation and convergence towards the best ERM performance.