When the price of oil dropped sharply in December 1985, it is clear that the UK authorities believed that some depreciation of sterling was appropriate (BEQB, 1986a, p.

Despite the abandonment of the informal DM-peg the authorities noted in May that "exchange rate stability remains desirable in its own right, with benefit to industry, and will continue to be sought so far as is possible without jeopardising the counter-inflationary thrust of policy" (BEQB, 1988b, p.

The BEQB described the initial cuts as "made in the light of developments in the domestic monetary and economic situation and taking full account of the need to maintain market confidence in the authorities' commitment to the counterinflationary stance of policy and to the ERM discipline" (1991b, p.

The UK declined to follow the rise in German rates in mid-December 1991 (or the contemporary fall in US rates), but allowed sterling to make fuller use of its wide band in the ERM, while "[a]t no time during [1991 Q4] did the market seriously question the commitment to sterling's ERM parity" (BEQB, 1992a, p.

Gradually, however, it began to seem that while the pass-through into import prices was of the order of 100 per cent, that into the general price level was much smaller (BEQB, 1993c, pp.

There was plenty of short term 'noise' of this sort, documented in the BEQB for the earlier years in particular (but largely ignored in the second section above precisely because it was short-term noise), but there were also a number of large movements of the exchange rate which fell into this category, notably those which led to the two major overvaluations.

(7.) References in the text to BEQB 1975a/b/c/d etc are to numbers 1/2/3/4 of the BEQB in the year concerned, while references to BEIR 1994a/b/c/d etc are to the (separate) issues of the Inflation Report.