Five weeks in the life of the pound: interest rates, expectations and Sterling's exit from the ERM

Bond prices were used to determine interest rate behavior and expected inflation for five weeks beginning Sep 16, 1992, during which the sterling's ERM membership was suspended due to heavy selling pressure. An analysis of the macroeconomic effects of the change in the exchange rate regime revealed that monetary policy had a significant impact on short ex ante interest rates and that the financial market was able to assimilate and react quickly to new information. With the shift in regime, inflation was predicted to increase to 6%, while high short term interest rate was lowered to a level close to the long run real interest rate.