Following a year of unprecedented turmoil, pressures within the exchange rate mechanism of the European Monetary System intensified further in July 1993, culminating in a decision to widen temporarily the bands for mandatory intervention to plus or minus 15 percent from the central parities, effective August 2 (a full chronology is given in Box 3 at the end of this Chapter).11 It is still too early to gauge the full ramifications of the new intervention rules, but the initial reaction of financial markets suggests that most ER M countries may now be able to set interest rates in closer accordance with domestic requirements without incurring excessive depreciations of their exchange rates. This, however, will require that they move cautiously and do not jeopardize the credibility of their commitments to price stability. As governments take advantage of the greater flexibility offered by the wider bands, it seems likely—and, indeed, appropriate—that short-term interest rates in Europe will decline significantly during the period ahead. Prospects for recovery should therefore also gradually improve.
International Monetary Fund Copyright © 2010-2021. All Rights Reserved.