Sterling slide is `just a wobble' says Governor oveyr 2
Tuesday 28 March 1995
The British economy is slowing to a sustainable pace, and sterling's recent weakness is ``essentially a wobble'', according to Eddie George, Governor of the Bank of England. His comments cemented the City view that there will be no rise in base rates at next week's monetary policy meeting.
Speaking in Helsinki, where he is visiting the Bank of Finland, Mr George said: ``We're seeing some signs that the economy is slowing down from a pace that was clearly unsustainable to a more sustainable pace.''
The Governor pointed out that the underlying rate of inflation was still low but was above its trough of about 1.25 per cent.
This modest upturn in inflation was the reason for the three increases in base rates since September - to the present level of 6.75 per cent - which he described as a ``not insignificant tightening'' of policy."
Home-grown inflation pressure was ``pretty modest'' and the main short- term influences on inflation came from abroad, Mr George said. But he downplayed sterling's 4 per cent fall since January.
The pound had fallen as a side-effect of the weakness of the dollar. Short-term influences, including the British political situation, had also played a role. Mr George said: ``We have been drawn in a bit to the general turmoil.''
The financial markets read the comments as a bid to damp down expectations of a further increase in interest rates before the next meeting between Mr George and Kenneth Clarke on April 5.
Gerard Lyons, chief economist at DKB International (the securities arm of one of the major Japanese banks) said: ``The Governor wants to stop us all from trying to double-guess policy moves.''
In minutes of the February meeting between the Chancellor and the Governor, published last week, Mr George emphasised market pressures as the reason for raising base rates at once rather than waiting.
Some analysts concluded that market conditions had moved up the list of factors influencing monetary policy and some have also noted that the pound's fall this year is equivalent to 1 per cent off interest rates.
Mr George ruled out sterling's early return to the European exchange rate mechanism. He said monetary union could happen this decade but he thought that unlikely.
There was a danger of political aspirations running ahead of economic reality, he said, but meanwhile the Maastricht convergence criteria were a very sensible guide to policy.
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