The economic backdrop was propitious, with economic growth sustained in the United Kingdom for the fifth successive year, and inflation remaining low. Bond yields fell, by more in the United Kingdom than in many other countries. In Europe, the prospect of EMU came into sharper focus, with implications both for market yields and trading arrangements.
The Bank introduced reforms to its sterling money-market operations in March, widening the range of counterparties with whom the Bank would deal, and including gilt repo as a regular instrument in the Bank’s open market operations. As a corollary, the Bank’s counterparties in the gilt market, the gilt-edged market makers, were no longer required to be separately capitalised or specially supervised. Later in the year, the upgrading of the Central Gilts Office service at the Bank was completed, enabling the start of gilt strips trading. Looking ahead, work is under way to set up the UK Debt Management Office, which will assume responsibility for the Government’s debt management from April 1998; changes to bring the sterling markets closer into line with the prospective euro markets are planned for 1998; and, following the introduction of index-linked auctions in the United States, HM Treasury is consulting the UK market about a similar initiative here.
Gilt-edged and sterling money markets: developments in 1997