Let me deal first with inflation. Low inflation creates a climate of stability which encourages savings and investment in the future of this country. Nothing would
be more damaging than if we let inflation off the leash again only to have to take another dose of bitter anti-inflationary medicine.
The British experience is that high inflation has brought economic recovery to a halt three times over the past 20 years. That.is three times too often for my liking. And while we have succeeded in bringing inflation down to levels that were last seen when England won the World Cup, we must never take that for granted. Before that game I had lived in a low-inflation' economy. After that game came Harold Wilson, in political terms.
I live in a low-inflation economy again now and am glad to say that our inflation rate is now well below the European average. We need to keep up that performance if we are to be a competitive manufacturing nation enjoying the living standards of the best in future. I will therefore continue to set interest rates to meet our objective of keeping underlying inflation in a range of 1 to 4 per cent., and in the lower half of that range by the end of the present Parliament. That is a tough target by Britain's recent standards, but not by those of some of our best competitors.
To make sure that we achieve that target, I have backed good intentions and resolve with a number of important decisions over the past year that have strengthened the framework of policy.
The Bank of England's quarterly inflation report is now fully independent of the Treasury. The Governor decides the precise timing of interest rate changes. And, most importantly, I decided in the spring to publish the minutes of my meetings with the Governor. As a result, we in Britain now have one of the most open frameworks for monetary policy-making in the world. This will stand us in good stead in keeping inflation permanently low; but it will most certainly not avoid the need to take tough decisions at times.
In September the Governor and I agreed that, with the recovery strengthening at home and prices rising abroad, there was a sufficient risk of inflation picking up here to justify raising interest rates by half a per cent. By acting before retail price inflation itself picks up, we will aim to nip inflation in the bud.
I expect inflation to rise slightly over the next year, reaching a temporary plateau of around 2½ per cent., as a result of higher commodity prices and stronger profit margins in our very buoyant manufacturing industries. But continuing competitive pressures will ensure that producers and retailers keep costs under control and pass on the benefit to consumers. I expect that underlying inflation should then resume its downward trend.