Last March it was already obvious that the pound was overvalued, that the retail and financial sectors were overheating and that we had a skills shortage which was beginning to push up wages in the private sector. There was a need to reduce liquidity without adding to the factors tending to make the pound attractive to overseas investors. Since inflation is one of the effects of a high level of money circulation, it can be held down by reducing that circulation by encouraging savings or by taxation. Higher interest rates can do the former, but fiscal measures have a bigger part to play in both. It came as a disappointment, therefore, when last March the Chancellor chose to transfer pounds 6bn from savings to reducing public debt, without doing anything to reduce money circulation. He thus laid the onus of controlling inflation entirely on the MPC and exacerbated one of the factors forcing up the pound, namely higher interest rates.
The MPC has had to respond to the resulting continuation of inflationary pressure in the only way it could. The level of the pound will eventually be corrected by our accumulating a trade deficit, while we continue to suck in imports to feed the consumer boom the Chancellor has ignored. By the time that happens, manufacturing industry will have been forced to cast another million or so people on to the dole. No doubt the City will celebrate by paying out pounds 1bn in bonuses next Christmas.