16 FEBRUARY 1991, Page 22


Another idea from those wonderful parrots who gave you the ERM


Here at last comes the interest-rate cuts — but not the devaluation. The last time we devalued the pound, Bank rate went up, to the highest rate for half a century, I remember how it caught the Bank of England flat-footed. The Bank had numbers printed on white card and displayed in a wooden case, to show what the rate of the day was — but they only went up as far as 7. An 8 had to printed in a hurry. That was 24 years ago, when 8 per cent was still a crisis rate (ah, happy days) and for all sterling's ups and downs, it has not since then been moved down from one fixed rate of exchange to another. Norman Lamont now finds himself urged to try again — as a cure for high interest rates. As if it were! A year ago any parrot could tell you that we should cure them by joining the European exchange rate mechanism. Once we joined, foreigners would be impressed, sterling would streng- then and the only danger would be that our interest rates would be forced down too fast. The parrots were wrong about that. Now the very same parrots can tell you that we went into the ERM at the wrong exchange rate. We picked on 2.95 marks to the pounds. Now, they say, let's pick again — but pick something a little lower, which would take the pressure off sterling and give us room to cut interest rates . . . . Fatuous fowl. When you devalue, you have to put interest rates up. There are, as there always were, two reasons for that. First, you have told the world that you did not mean what you said last time, so now you must try harder to show that you mean it this time. Second, by devaluing, you im- port inflation from abroad, so that you need to tighten up policy at home.