What is Governments policy on the pound?
Nevermind whether comments from Conservative shadow chancellor George Osborne can move sterling, who is in charge of looking after Britain’s currency? When the Bank of England was made independent, managing the exchange rate fell through the cracks.
Managing the pound – usually rescuing it – was for decades a joint job of the Treasury and the Bank – just like setting interest rates. Indeed, interest rates were one of the main tools in supporting sterling, along with using the national reserves to buy the pound.
Now though the Bank, not government, sets rates and its only objective is to control inflation; there is no remit about stabilising sterling.
In the days of fixed exchange rates, keeping the pound within its limits was the country’s main economic problem. We spent millions – and in later years, billions – of reserves to hold the rate.
Sometimes the battle was lost and the pound was devalued, setting a new line in the sand to defend. In calmer days, chancellor Nigel Lawson secretly tied the pound to the deutschesmark by using interest rates ands reserves. That allowed Britain to join the European Exchange Rate Mechanism when the same tools were subtlety used to maintain the conversion rate until Black Wednesday saw the Bank and Treasury spend billions of reserves on buying pounds before the battle was lost.
The subsequent free floating pound has apparently required little support as the currency moved gently against dollar and euro, strengthening for much of that time. But it is now falling sharply against both of those major currencies – even without Osborne exacerbating the decline – and no-one appears to be in charge of stopping the fall.
Did the Bank think of the currency consequences before its steep cut in interest rates in November 2008? Are reserves being used to support sterling? Is there a political policy on the correct level for the pound? Who knows?
My guess is that the government is quite happy for the pound to fall, and if it is not engineering the decline it is not halting it either. Business is not complaining because it helps exporters. The Bank - which would have at least appreciated the effect on sterling even if it is outside its brief - is unconcerned that the fall will raise prices because its current worry is that inflation will be below target, not above. And if the public decides foreign holidays are now too expensive, perhaps they will use their money to reflate the UK economy.
But because we think a “weak” pound is a bad thing, ministers will not admit they like the fall.
Osborne was asking for trouble by inviting accusations of making it weaker.
And when Britain benefits from the lower exchange rate he will be unable to take credit for it because he criticised the government for allowing fall.
However, it would be interesting to know what the government policy on the pound is and who is in charge of delivering it – and thus who to blame when the target is missed.
