12  All speeches are available online at www.bankofengland.co.uk/news/speeches  12  b) CPI inflation Per cent 3.5 EU referendum 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan 14  Jul 14  Jan 15  Jul 15  Jan 16  Jul 16  Jan 17  Jul 17  -0.5 Jan 18  c) UK and G7 growth Percentage changes on a year earlier 4.0  EU referendum  3.5 3.0  Swathe of other G7 countries  2.5 2.0 1.5 1.0  UK GDP growth  0.5 0.0 2015  2016  2017  -0.5 2018  Sources: Eikon from Refinitiv and Bank calculations. Sterling dropped immediately following the referendum, the biggest recorded single day move, and it subsequently traded around 15 to 20% below its late-2015 peak ahead of the referendum being called. Inflation rose well above the 2% target, eventually peaking at 3.1% in late 2017, an overshoot entirely due to the referendum-induced fall in sterling. UK growth dropped from the fastest to the slowest in the G7. Households trimmed spending, as the effects of sterling’s fall showed up in higher prices in the shops and squeezed their real incomes. Business investment was cut back more markedly, despite supportive financial conditions and (at the time) strong global growth, as companies understandably put projects on hold whilst they waited for greater clarity over the UK’s future trading relationships.
This has been confirmed in an ECB assessment of Malta’s monetary and exchange rate policy in connection with the Pre-Accession Economic Programme Report for 2002, where it is noted that the current regime has served Malta well in promoting real and nominal convergence. In view of these considerations, and given the importance which exchange rate stability has for trade and investment, the current regime remains the preferred arrangement for Malta. Taken together, therefore, the institutional arrangements governing ERM II and the successful experience with the current fixed exchange rate regime suggest that the way forward will consist of a gradual reduction in the weight of the US dollar and sterling in the currency basket, such that by the time Malta will be ready to join ERM II the euro will be the sole reference currency. If the United Kingdom were to join EMU in the meantime, this would automatically raise the proportion of the euro in the currency basket, making the approach to ERM II that much easier. Consistently with this objective, the weight of the euro in the basket was increased from 56.8% to 70% last August. BIS Review 70/2002  3  Given that Malta’s optimal exchange rate strategy in the run-up to ERM II has been identified, the next question concerns the choice of the central exchange rate and the fluctuation bands. The choice of the central exchange rate and fluctuation bands Some might argue that the choice of the central rate is not vitally important.