● The final quarter of 1997 was volatile for financial markets, in part as the Asian crisis deepened.
● Major government bond markets rallied as investors favoured their higher credit ratings. Credit spreads widened for non-government unsecured borrowing, both in bond markets and money markets. Equity markets initially fell sharply in response to the Asian turbulence, but later recovered.
● The foreign exchanges were also volatile. The US dollar, commonly seen as a ‘safe haven’ in times of crisis, rose against most major currencies. The yen weakened, affected both by the crisis in neighbouring Asian countries and by the growing financial problems in Japan.
● Against this background, and with further news about the domestic economy, there were sharp changes in expectations of interest rates in UK markets.
● The Bank’s Monetary Policy Committee raised the Bank’s repo rate on 6 November to 7.25%. At the end of the quarter, there was little market expectation that UK official interest rates would rise further.
Published on
01 March 1998
Markets and operations