interest rates, devaluation of sterling, or withdrawal from the European exchange rate mechanism.
In a defiant response to critics on both sides of the House, and in an attempt to steady sterling for the three-month summer recess starting on Thursday, the Prime Minister said in a statement on last week's Munich summit: 'Unless we get inflation down and keep it down, there will be no lasting growth.'
Mr Major was speaking against the background of a sharp drop in the pound yesterday despite his and the Chancellor's categoric rejection of devaluation. Speculation that the German Bundesbank is poised to tighten credit conditions further this Thursday drove sterling down by more than 2 pfennigs to DM2.8523, close to its all-time low in the European exchange rate mechanism.
In Parliament, Neil Kinnock said that the Government's policies risked perpetuating recession and unemployment: suppressing rather than eradicating inflation, while preventing growth.
Mr Major told the Labour Party leader that the summit had agreed unemployment would be curbed only by non- inflationary growth - 'the only way in which we can satisfactorily proceed'.
He said: 'No one expected that an anti-inflationary policy was going to be easy in every respect. It never has been, and it is not now. But it is absolutely imperative that we do not duck the necessity of bringing inflation down to a level below that of our competitors, as low as we can get it, to nil if possible, and seek to keep it there.'
Mr Major told Peter Tapsell, a Tory critic, that the exchange rate mechanism was 'at the centre of our anti-inflationary strategy', and warned: 'There is a very real risk that were we to leave the exchange rate mechanism, the net result would be that interest rates would rise, rather than fall, and that is not remotely what would be helpful to the British economy . . . We are now making great progress on inflation. I have no intention of throwing it away.' Underlining that point, he said later: 'We are not going to change the policy we have set; not out of stubbornness, but out of conviction.' As for specific calls for devaluation, Mr Major said: 'We have seen through the years that devaluation of the currency . . . leads only to a very short-term gain that is very rapidly eaten up.'
On reflation, he said: 'There has been more than one occasion since the Second World War when the government in office has reflated at precisely the wrong moment, and re-created exactly the problems we were seeking to solve. We are not prepared to do it again.'
That did not stop another Tory critic, John Wilkinson, arguing that if the United States had pursued the European interest rate policy, its economy would have moved from recession into slump.
Mr Major said: 'Over the past few years, as the Americans have repeatedly reduced their interest rates, it has not produced the kick-start to the economy that many people anticipated for them.' Nevertheless, he added: 'We have reduced interest rates by 5 per cent over the last two years, and when it is appropriate we will reduce interest rates. But it has to be when it is appropriate and when we can sustain the exchange value of sterling . . . That has to be the key part of the decision that we must make. But when it is appropriate, of course we will reduce them.'
Bundesbank policymakers are engaged in an intensive debate over whether to take action to rein in money supply growth and inflation, which are high by German standards. Norman Lamont said yesterday that he hoped Germany would not tighten its monetary policy. 'I hope there won't be an increase in German interest rates later this week,' he said after a meeting of European finance ministers in Brussels. But he insisted that 'in the end, it is a matter for the Germans to decide'.
At the meeting, Germany came under renewed pressure not to allow the Bundesbank to raise interest rates at its board meeting on Thursday. Several EC finance ministers feared Europe's recession will be prolonged if Germany further tightens its monetary policy. Mr Lamont was chairing the meeting as the British EC presidency's representative rather than as Chancellor.
French finance ministry sources, however, were insisting that 'the reality is that interest rates are too high,' and expressed their hope and belief that the Bundesbank recognised that reality. Ministers meet, page 8
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