A Guide to UK Monetary Policy by Paul Temperton

By Paul Temperton

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Only deposits denominated in sterling and held by the private sector are included. Both bank and building society deposits which satisfy the criteria are included, as well as deposits in the National Savings Bank Ordinary Account (Chapter 7 discusses types of National Savings in detail). Public sector deposits are now excluded from all measures of money in the UKS. Before February 1984, £M3 and M3 included such deposits. Their level was small, although often erratic, and not related in any meaningful way to economic developments.

For this reason the covered rather than the uncovered interest rate differential may be an important factor influencing the banks' switch positions. When presenting changes in balance sheet levels an attempt is made to exclude the effect of exchange rate changes so that changes in foreign currency items in BEQB Table 6 reflect only actual transactions in foreign currency by the UK banks. 6, where the foreign currency items are known to be denominated in dollars, the adjusted sterling change in foreign currency items can be calculated according to the formula: where: dT = actual transactions in foreign currency items in terms of sterling, over the banking month xt = stock of foreign currency items at t in terms of sterling et = appropriate exchange rate at t et = daily average of appropriate exchange rate over the banking month The sterling levels of foreign currency items are reconverted back into foreign currency values at the make-up day exchange rate.

Switches between on and off- 24 A Guide to UK Monetary Policy balance sheet forms of intermediation, possibly as aresult of direct controls on banks' balance sheets, may result in the consolidated balance sheet of the UK monetary sector giving a misleading indication of monetary conditions. Deposit taking and credit lines can also be extended to UK residents, either in sterling or in foreign currencies by banks outside the UK monetary sector, whose balance sheets are not included in the measurement of £M3.

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