'The opportunity to rebalance policy': The following are extracts from the Chancellor's 'Mansion House' speech at Guildhall last night.

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It is just six weeks since we left the ERM. Though the aims of government policy remain the same, we are now in an entirely different policy environment. We are outside the ERM and are likely to remain so for some time.

But the wider world has changed too. Most significantly, there has been a further deterioration in the prospects for the world economy.

Here in Britain, the frustrated hopes of the last year have led to a decline in business and consumer confidence, and this has been exacerbated by recent events.

The significant depreciation in sterling seen over the last six weeks undoubtedly gives British exporters greater opportunities to win business in foreign markets. British industry now has interest rates which, apart from a few months in 1988, are the lowest since 1978. These developments have undoubtedly enhanced the prospects for recovery.

Leaving the ERM was a setback, but it has given us the opportunity to rebalance our policy to take greater account of the risks to the world economy. The dramatic progress we have made in getting inflation down does allow me now to give greater weight to securing an early resumption of growth.

Government and industry need to work together to rebuild confidence. But economic confidence is an elusive quality; it cannot simply be drawn like a rabbit from a conjuror's hat.

Over the medium term the prospects for interest rates in this country will depend as much on fiscal policy as on the monetary stance. Last July, I set up a new system for the control of public spending, with two aims in mind. First, to ensure that the Government's spending plans are fully within the country's means. While it is perfectly sensible to allow the PSBR to rise at a time of recession, a tight fiscal position over the medium term is absolutely essential if I am to keep interest rates down.

Second, I wanted to ensure that public money was directed towards the Government's priorities. It must make strategic sense to ensure that, wherever possible, spending on the infrastructure is maintained at a time of recession.

Government has to take a lead from industry and keep a firm grip on its current expenditure. And I have also been determined to find ways of giving the private sector a greater role in financing capital projects. I am determined to ensure that our rules allow that to happen and I shall be announcing my proposals in the Autumn Statement.

I know that many people have been concerned that the Government does not adequately distinguish between current and capital spending. From the first Unified Budget in December 1993, I have decided that the Government accounts should be drawn up in a way which makes a proper distinction between current and capital transactions. I believe this will help to underpin the Government's commitment to infrastructure investment in the longer run.

But the key to improving the economy's growth performance over the longer term is continuing supply-side reform.

The Government cannot talk the economy out of recession. We cannot press a button and see the economy spring to life. But we can examine every development, every policy option, every idea and ask ourselves - does this support industry? Will it help confidence? Will this get the economy going?

I propose to invite a number of independent forecasters to join a new Forecasting Panel, to meet at regular intervals, and then publish an assessment. This would include the full range of forecasts made by individual panel members, as well as some summary of the central view and the risks attached to it.

Prospective, not current, inflation will be our guide. Monetary adjustments take time to have effect, and a low inflation rate today is not in itself a reliable cue for a relaxation of policy.

Some people insist that movements in the exchange rate are just a change in relative prices which need not affect the rate of inflation. Others argue more pragmatically that disinflationary forces are currently so strong, that such pressures pose no threat. I am not persuaded by either of these arguments.

There is the argument that this set-up is too judgemental. The need for judgement is obviously greater outside the ERM, which makes it all the more important that it is exercised in a consistent way. I propose, therefore, to implement three changes to make the formation of policy more transparent and our decisions more accountable.

First, I intend to publish a monthly monetary report following the regular meetings which take place between the Governor and myself. This will, apart from certain market-sensitive items, set out the information on which our policy judgements are based, showing the bad news with the good, from month to month.

Second, whenever a change in interest rates takes place - and this cannot, of course, conform to any timetable - we will provide an account of our reasoning, much as we did when I cut interest rates on 16 October.

Finally, I have asked the Governor to provide a regular report on the progress being made towards the Government's inflation objective. This will be published in the Bank's Quarterly Bulletin.

Leading article, page 18

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