Commentary: The stern lectures make sense

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The Bank of England is not able to offer any more optimism on the economy than anyone else. Indeed, it is far from sure that anyone would believe it if it did. The Bank's crystal ball has proved as opaque as most others', if not more so, over the past year. The most confident assertion in the Quarterly Bulletin is merely that 'the outlook thus remains very uncertain but slow growth in the economy should be evident during the remainder of this year'.

Little has changed since the Bank's description of our predicament nearly a year ago: we are bumping along the bottom. Indeed, if the recent turn towards gloom in the business confidence surveys is to be believed, we may be heading for another bump down the stairs.

Where the Bank is on firmer ground is in its robust and convincing arguments against a change of monetary policy. The Old Lady of Threadneedle Street, bustles up and fingers wagging, has rediscovered the virtues of sound money. She has taken to giving stern lectures about the three 'Cs': credibility, consistency and commitment.

Nor are they foolish lectures. What would the financial markets make of any government that abandoned the policy it said was to be the lodestar for the economy after only two years? How much extra would the markets expect it to pay in interest rates as a risk premium against future fecklessness?

The slick answer is that it makes sense to abandon a policy that is not working: the Government was right to ditch broad money targets after 1980. But the Bank is equally convincing on that score. After all, the eight founder members of the exchange rate mechanism have subsisted happily since 1979. It is a tried and tested policy regime, not some new fad. No one ever claimed that the ERM would abolish the business cycle, reduce unemployment at a stroke, or act as a patent cure for debt hangovers of the sort that Britain incurred during the boom of 1987-89.

It is that level of debt that has fundamentally determined the shape of the recession, not the ERM. Even if we had been able to cut interest rates further outside the ERM - not obviously the case, given any government's need for a weather eye on sterling - it is far from clear that a recovery would yet be under way. After all, there have been 23 interest rate cuts in the United States, an economy suffering similar levels of debt. But the US recovery is as anaemic as ever.

In the long run, the ERM is simply the best guarantee that we will not undergo any such economic rollercoaster again. By providing a stable and non-inflationary climate for business, it will eventually provide the most favourable conditions for prosperity. The Bank is right to remind us that there are no shortcuts.