My Lords, like the noble Baroness, I too would like to keep the exchange rate steady. There used to be an idea that a managed exchange rate could benefit the economy—that there was a direct cause and effect. If only life were so simple. Chancellors thought that a strong currency would create a large balance of payments deficit and so some tried to manage it down, only to find that that resulted in rising domestic prices and low investment. A lower exchange rate may make some of our exports cheaper, as the noble Baroness said, but as the November Bank of England inflation report points out, we have become increasingly integrated into global supply chains. That makes imports more expensive, and alternative UK suppliers need time to gear up, by which time the customers may have gone elsewhere.
An added complication is that the current uncertainty over Brexit and world trade does not encourage the necessary investment to replace imports. Also, we are very reliant on exporting services. Services are less price sensitive and frequently themselves require some overseas investment—investment which becomes more expensive.
A high exchange rate has been partly blamed for business migrating, leaving low-paid jobs with no future in the old manufacturing areas. Again, it is not as simple as that. Other businesses have shown that investing to raise productivity with new innovation and new technology demonstrate that the so-called high rate of exchange is not a barrier to a successful business. Manipulating the exchange rate does not compensate for low investment and poor business management.
New technology in all its forms affects our exchange rate. There is the potential of technology to invent new currencies. Technology can enable firms to trade without the intermediation of banks. Then there must be the possibility of massive cyber intervention in the exchange rate markets, causing the pound to fluctuate and draining confidence in the reliability of our currency. Then there is the matter of a fluctuating exchange rate through competitive devaluation. That is the kind of thing that the Bretton Woods agreement tried to eliminate, but was unsuccessful. The next President of the United States has called China an exchange rate manipulator and will impose tariffs on trade with China. China, a country that holds much US dollar debt, will in turn retaliate. In effect, that becomes a race to the bottom.
The noble Baroness spoke about the impact on farmers. According to a recent CBI survey, the pound’s recent drop is a mixed blessing. A third of manufacturers said that it helped exports, but nearly half said that the impact on their business had been negative because of the higher cost of imports. The rest said that the effect was neutral. The general public, too, are apparently sceptical about currency fluctuation. Apparently, the consumer thinks that as the currency goes down, prices go up immediately, but when the currency goes up, prices come down very slowly.
Some years ago, a member of the editorial staff on the Financial Times pointed all this out and proposed that much of the responsibility for the exchange rate should lie with an independent Bank of England. That became law in 1997 and the journalist became the Chancellor’s economic adviser, which led to a distinguished career in Parliament. He is now stepping out to even greater things. Mr Ed Balls is a contemporary of the noble Baroness. I note that today he has called for central banks to “sacrifice some … independence”. I am not sure how independence can be nuanced; you are either independent or you are not. The Bank needs independence to carry out its purpose, and the purpose of that independence is to maintain a long-term stable but floating exchange rate without fluctuations so that business and the public sector can take a long-term view with less uncertainty about short-term fluctuations.
During the uncertain days just after the referendum, it was the governor and the Bank of England that kept the exchange rate far more stable through their technical intervention than it would have been if it had just been left to politics. The criticism made of the governor for warning that Brexit would damage the economy is mistaken. It was entirely in his line of duty, and it is certainly no reason why monetary policy should be handed back to politicians. Our exchange rate must not be politicised. It is part of the mechanism of adjustment, as the governor said recently.
Certainly the remit can be looked at, but less so the mechanics. Holding the exchange rate steady while allowing it to float is a technical and complicated manoeuvre requiring a lot of experience, skill and knowledge—expertise which some have ceased to value. However, others like me think that these skills have a value and I would like to see the exchange rate managed using a kind of Haldane principle where specialists place the national interest before sectional interests, particularly when economic data will be evaluated in the uncertain light of Brexit.
Of course, decisions on interest rates have a major effect on the exchange rate of the pound. Again, we have taken this out of the hands of politicians for the same reasons, but some politicians have said that the Bank of England is wrong to rely on ultra-low interest rates and have called for its independence to be taken away unless it raises interest rates soon. They were at it again last Tuesday. Yes, experts get it wrong sometimes and forecasts are uncertain—that is why they are forecasts. People have to make a judgment.
Where there is a case for political interference is in recognising the danger of another financial crisis because another one must be a danger to the stability of the pound. Take, for instance, the huge financial business conducted in London by banks and Governments on derivative transactions, interest rate swaps and other exotic financial trading—trading that some people call betting. This exceeds by far ordinary banking, insurance, fund-raising and other traditional financial businesses. In fact, London clearing has 90% of this world business. The numbers are huge and greater by far than the balance sheets of the banks that caused the crash. It is a global business conducted by Governments, banks and trading organisations. We are told that owing to the unique expertise found in London, there is no danger to sterling, but once the leverage gets out of hand, as happened in 2008, who knows what will happen? This is where Ministers should be concerned, but are they? Leaving the Bank of England alone to be a stable and independent institution normalises our lives and our exchange rate, and holds it steady. It is an institution that provides stability for our currency.
I thank the noble Baroness for this debate because up until now it has demonstrated that a stable and consistent rate of exchange is central to the success of our economy. Can the Minister tell us how the Government plan to ensure this stability in the promised industrial strategy? Will there be political control or independent control?