The foreign exchange market and the economy today

Quarterly Bulletin 1992 Q2
Published on 01 June 1992

The Governor discusses a number of issues surrounding today's foreign exchange market. He stresses. that new clearing and settlement systems, currently under discussion, are more likely to reduce counterparty risk (which has become an important concern of the banking sector) if these new systems are based on the standards set by the Basle Group of G10 central banks. He goes on to discuss the links between the exchange rate and monetary policy; and the importance of maintaining the credibility of policy in the eyes of the market. Western Europe has sought to achieve this through the ERM, whose success has relied on the commitment of each member to price stability. The Governor suggests that, in looking for a credible and necessary anchor for their own counter inflationary policies, the countries of Eastern Europe might consider pegging their currencies to the Ecu. Turning to economic and monetary union, the Governor argues that the future European Monetary Institute's natural location would be in London, given that the effectiveness of the Institute will benefit greatly from a deep understanding of financial markets.

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