No, my Lords, the best contribution the Government can make to exchange rate stability, consistent with their objective of a stable and competitive pound over the medium term, is to maintain sound public finances and low inflation.
My Lords, do not the Government agree that at the moment the pound is uncomfortably high and way above its fundamental equilibrium rate? Do not they accept that, while seeking to maintain the value of the pound against market sentiment is likely to fail, the quite different proposition of buying foreign exchange and selling pounds in order to depress the pound can be much more successful? If the Government are worried about the inflationary consequences, may I refer them to a persuasive paper, written by Peter Bofinger of the European Parliament, which seems to demonstrate that inflationary effects can be contained by the judicious selling of bonds, as was practised very successfully by the Bundesbank in 1992 and 1993? Does it not follow inexorably that my request should be seriously considered?
My Lords, I am grateful to the noble Lord for attempting to improve my economic education and for his references to the literature. There are different views about the strength of the pound. I am aware that there are views held by manufacturing industry and the TUC which coincide with those of the noble Lord, but they are by no means universally held. As to the original Question about intervention, I remind the noble Lord that our total UK foreign currency assets, held both by the Bank and by the Treasury, are equal to 20 per cent of the daily trading in sterling on international markets. I do not think we will get round that by any of the alternatives proposed by the noble Lord.
My Lords, I am sure that the Minister will agree that this matter requires the most careful and serious consideration. We are doing well economically as a whole, but there is no doubt whatever that our agriculture and manufacturing industries are under great pressure, and have been for some time. They are facing falls in output and, above all, losses in the export markets. It is no good ignoring that; we have to do something. Even accepting the handing over of the Chancellor's former powers of control over interest rates to the Bank of England--I do not wholly agree with that, but having swallowed it--surely it is possible for the Chancellor, with the Governor, to modify the terms of reference so that inflation within the ceiling of 2.5 per cent is not the only consideration taken into account when interest rates are set. To complete the point, does the Minister accept that, above all, the greatest single factor dominating the level of sterling is the differentially high interest rates in London which suck in so much footloose money?
My Lords, my noble friend also seeks to improve my economic education. I am grateful to him for that. I do not think the Government can be accused of being indifferent to the importance of the Question, as I thought my noble friend implied. It is simply not the case that manufacturing output fell at any stage over the past two and a half years. It was stable for some time rather than rising, but it did not fall. On the most recent figures--those for the third quarter of 1999--export volume, excluding oil and erratics, rose by 6.8 per cent, with exports of goods surpassing the levels of the year before that. Manufacturing output recorded growth, and most forecasters expect manufacturing growth to increase by between 1.5 and 2 per cent this year. It is of course a serious problem, but it should not be exaggerated.
My Lords, I am grateful to the Minister for reminding the House that Britain's official reserves amount to 20 per cent of a day's trading. In fact, they represent 5 per cent of total trading on the global currency markets. In the light of that, and perhaps of his awareness of the survey published this week which showed that despite our strong pound and despite being outside the euro Britain is still thought of as the most attractive single place on the planet for investment outside America--in flat contradiction of government statements on that subject--does the Minister agree that it would be better if the Government would not prevaricate but say straight out that intervention to lower the rate of sterling should be utterly rejected; and that we should take the view, as do the Americans, that if we have a strong exchange rate for our currency, we should simply say "Hooray"?
My Lords, I am very interested in the noble Lord's choice of words. He said that we are attractive for investment despite the fact that we are outside the European currency. I do not think that is the view of his party. It thinks that we are attractive to investment because we are outside the European currency. The facts I have given are not in contradiction with government policy but with the policy of the Opposition. I thought that I had already sufficiently clearly rejected the option of using a policy of intervention, sterilised or unsterilised, in the exchange rate.
My Lords, I would not dream of endeavouring to teach economics to the Minister or to any other noble Lords, but would my noble friend care to remind the House that sterling fell continuously from 1982 to 1987--I shall not remind your Lordships which party was in power at that time--and that the balance payments on the whole worsened and manufacturing suffered? That might suggest that perhaps the connection between sterling and the real economy is by no means as simple as some commentators suggest.
My Lords, I am sorry that my noble friend does not think that I--or, indeed, any of your Lordships--are sufficiently qualified to be his students in economics. My noble friend is right. If I had had the time, I would have rejected the view of my noble friend Lord Shore that we should set the Bank of England an exchange rate target in addition to the inflation target.