The Bank must uphold the value of the pound

The Bank of England meets this week to decide interest rates with its policy in tatters.

Its sole aim is to keep inflation down to 2% per annum. The reason behind that instruction is to uphold the purchasing power of our currency. Neglect has led to a big devaluation of the pound, meaning our purchasing power if we wish to buy goods and services from abroad has been slashed.
As overseas trade represents a susbtantial slice of our economy, this is a serious assault on our living standards. Indeed, many of the luxuries and extras are imported, leading people to feel much worse off when their prices rise on the back of a devaluation.

The Bank’s problem is there is no easy way for it to restore the value of the pound at home and abroad. Raising interest rates would be the traditional response to a sinking currency, but in these conditions that might be seen by the markets as short term, leading to a bigger decline in economic output and worse problems next year. Markets could take fright rather than buying pounds, as they would not see it as a sustainable policy.

Cutting rates in the way we need to stimulate activity could also deter people from buying sterling, for the obvious reason that it lowers the return you make from holding the currency.

Leaving things as they are, the likely decision of this week’s meeting, just delays sorting out the mess, and may not help either. It looks like dither.

So what should the Bank do? If it were serious about rebuilding confidence in our currency, and defending its value, it would send a public letter to the government demanding they take the action needed to restore confidence. If the government produce new sensible forecasts, takes action to rein in its wilder and less desirable expenditures, sorts out Northern Rock and did one or two other things to show it wanted to get on top of the financial crisis, then the Bank could cut rates.

When the US took concerted action to improve the US economy, Fed and Administration combined, the Fed was able to cut rates and the dollar rose. It is the weakness of the UK economy that is adding to the fall of the pound.

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10 Comments

  1. APL
    Posted September 4, 2008 at 9:11 am | Permalink

    JR: "When the US took concerted action to improve the US economy, Fed and Administration combined, the Fed was able to cut rates and the dollar rose. It is the weakness of the UK economy that is adding to the fall of the pound."

    I disagree that any action of the Fed led to the rise in the US$. Rather it was the perceived change of stance of the ECB that boosted the US$.

    Up until recently, the ECB was hawkish, consequently many investors were buying Euros. The change in ECB stance led to a fall in the Euro against the US$, funds moved back into the US$ out of EURO and Sterling zone.

    It hasn't helped Sterling that the government is considered incompetent and with no sense of direction.

    We are, at the moment in a 'race to the bottom', or competitive devaluation. Reports I hear from the US give no grounds that their economy is improving, rather it is being propped up until November.

  2. Tony Makara
    Posted September 4, 2008 at 10:20 am | Permalink

    Seeing as so much of our food is imported from the EU I believe the MPC should at least be looking to either shadow the ECB or even to stay slightly ahead by raising rates when the ECB holds. This would indeed be a short term damage limitation exercize but necessary if we are to avoid the misery of food inflation, especially the price of food leaping 10% in just the last month. Raising rates would shore up our currency and help us keep pace with the Dollar's recent rally, which I believe to be transient. America cannot maintain a harder dollar long term because of the trade deficits it runs up.

    As for Britain, in the long term we need to look at making our country less dependent on imported food and fuel, the only way to do this is to produce in sufficent number so that domest supply is abundant and to award special low rates of taxation for producers who supply the domestic market so that investing in Britain pays big profits.

    The Labour government can help the Pound by keeping their council over the state of the economy and ditching their gimmicky spending plans, plus talking openly about how they intend to adopt a much harder fiscal policy.

  3. mikestallard
    Posted September 4, 2008 at 6:09 pm | Permalink

    It is beginning to look as if the Conservatives when they come in will have to initiate a revolution. I think we are beyond fiddling with the details now. This seems to me to be a confidence crisis.
    Firstly farming will have to be made over with all this nonsense about biofuels replaced by the provision of self sufficiency in food. Maybe we could get a few cattle farmers into some sort of export which they seem to have lost recently?
    Second, there will have to be a real attempt to deal with the coming power crisis by building some power stations, getting some oil stored and coal mined.
    Third, there will have to be a real drive for some form of exports, perhaps in manufacturing, which will bring in some cash.
    Fourth, public spending will have to be cut to the bone to bring down taxes so people find working more profitable than living off the State handouts, and so that leaders can actually earn money and enjoy it a little.
    Fifth, people will have to stop agonising over the "vulnerable" and start rewarding the adventurous. We need a total change in emphasis here: tough love perhaps?
    Are the present front bench the people to do this? That is the one million pound question.

    • Tony Makara
      Posted September 5, 2008 at 10:16 am | Permalink

      Good points. If we can generate a revival in manufacturing and agriculture we can begin to get people off benefits completely. The big problem with the service-sector is that it cannot employ enough people for a population of our size, plus the hours worked often means the state usually has to top up wages or pay a rent rebate. The only way we can get people living completely free of state depdendecy is through fully waged full time work. This is something senior politicians seem not to understand as they tackle the benefits issue. My great concern over workfare is that it isn't going to take people off benefits but will only give them something to do while on benefits.

      A revived manufacturing base, supplying the domestic market and exporting would be capable over time of producing the million jobs we need to end front line unemployment. Currently manufacturing only accounts for 9% of our economy, we need to create the conditions to at least double that. A revived manufacturing and agricultural base could also supply our retail sector with stable supply and prices, taking away the danger of imported inflation. However none of this can happen unless we make it profitable to supply the domestic market, that is where senior politicians can do their bit by ending non essential public spending and allowing business to keep much more of its money.

      • mike stallard
        Posted September 6, 2008 at 7:43 pm | Permalink

        We seem to agree. Today I am staying with my daughter who is off to Saudi where she will live in a society where taxation is at 7%, in a six bedroom house with optional servants and so on. My son came round – an architect -who is asking questions about Perth WA.
        We really have got to get our act together in this country or it will, truly turn into BengalChina in 50 years. Racist? No. I am talking about an economy based on slave labour with a few exploiters at the top.

  4. Bazman
    Posted September 6, 2008 at 10:36 pm | Permalink

    There is a story that Thatcher asked all the men into the drawing room for drinks but excluded herself from the woman. As told by a woman. I'm sure you remember his one John. The fact is Thatcher did little for woman as she did not see herself as a woman.

  5. Adrian Peirson
    Posted September 7, 2008 at 6:56 pm | Permalink

    Preserve the vaue of the Pound ?

    A £50 pound note costs less than 1p to Print.

    Money should have real value the only reason it works so far is because People have not realised yet that those fifty pound notes are not really worth £50, they are not miniature Rembrants, they are simply mass produced copies.
    http://www.youtube.com/watch?v=v0th92jAm_E&fe

  6. Adrian Peirson
    Posted September 7, 2008 at 8:38 pm | Permalink

    Have the Pound as Good as Gold. http://www.youtube.com/watch?v=v0th92jAm_E&fe

  7. Chris-Jeangeorgesmar
    Posted October 3, 2008 at 12:16 pm | Permalink

    Whatever happens I have been working abroad as a volunteer using money invested in a British bank account. I am in the Middle East. I have lost £13.40 on every £100 spent since March, 2008. I am not a conservative-voter but something's got to be done. I know friends who cannot get work despite having done well at university. Something's got to be done.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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