Forecast Summary

The outlook is conditioned by our assumption that sterling enters the ERM, probably in the autumn, at a central DM parity not very different from the current rate and that this exchange rate is held over the medium term. Fiscal and monetary policy have to be made consistent with a stable pound, which rules out tax cuts and restricts the fall in base rates to 12 per cent. The benefits of the ERM are to be seen in a reduction in the underlying rate of inflation to below 5 per cent by 1992. But ERM participation is not costless. The downside is four years of output growth averaging below 2 per cent and higher unemployment. The ERM offers the possibility of low inflation and steady growth in the second half of the 1990s: it is not a 'quick fix' for the current problems facing the UK economy.