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The Rate at Which Sterling Enters the ERM Is the Best Indicator of the Chances of a Tory Win

Magazine article Marketing

The Rate at Which Sterling Enters the ERM Is the Best Indicator of the Chances of a Tory Win

Article excerpt

The rate at which sterling enters the ERM is the best indicator of the chances of a Tory win

Squeals from the CBI have filled the newspapers in recent weeks. The pound is too high! Interest rates are too high! Wage increases are too high! Crying wolf is an occupational hazard of working at the CBI. British industry and British consumers in reality are meeting the slowdown in the economy much better than expected. The economy is going through a flat patch, as we have been predicting in this column for a considerable time. But exports are strong and the prospects for a recovery next year are good.

This is not to deny that severe economic problems do exist in the UK. The longer-term problem of the educational and training levels of the labour force is potentially very serious. In the short-term, inflation is too high. A vicious circle of high inflation, high wage settlements leading to high cost increases, in turn leading to high inflation is a very real threat. And interest rates at 15% hurt parts of the economy, although others are refreshed by high interest rates. But overall, it would be a good thing if interest rates came down.

How can lower interest rates and lower inflation be achieved simultaneously? There is one magic ingredient which could enable the Chancellor to hit both targets -- the exchange rate. A high level of sterling controls inflation by cutting the cost of imports. Entering the EMS at a high level could create sufficient confidence on the foreign exchange markets to enable interest rates to drop sharply. …

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