Читать книгу Foreign Exchange: The Complete Deal - James McDowell. Sharpe - Страница 19

The impact of the current account and interest rates on the exchange rate was never so clearly demonstrated as from 1978 to 1981. During this period sterling rose by over 20% against a basket of currencies. The arrival of North Sea oil in 1976, coupled with the second oil crisis of 1978-79, had turned a traditional deficit on the oil account into a substantial surplus; sterling was now viewed as a petro-currency. At the same time the UK was experiencing a boom, which, despite the oil surplus, contributed to a deficit in the current account that was countered by a sharp rise in interest rates attracting speculative flows.

From 1978 to 1980 the bank interest rate rose from 6.5% to 17%. This inevitably led to a sharp fall in manufacturing production and imports, which led to record surplus in 1981. Two factors mitigated against even greater sterling gains: the abolition of exchange controls in November 1979, which prompted large investment outflows, and Bank of England intervention. By 1981 sterling started to ease back but the damage had been done and British manufacturing had been dealt a blow it would never recover from.

The European Union at this time was looking for greater political and monetary union and in 1979 the European Monetary System (EMS) was established. The most important component of this system was the Exchange Rate Mechanism (ERM). Member countries agreed to peg currencies within a 2.25% band of a weighted average of European currencies; this weighted average was called the European Currency Unit (ECU). The early period was characterised by regular re-alignments – from 1979 to 1987 there were 11. The usual pattern was for low inflation, low surplus countries such as Germany and Holland to revalue and for high inflation, high deficit countries such as France and Italy to devalue. This arrangement is known as a ‘currency bloc’: a group of currencies fixed in value against one another but floating against all others.

During the 1980s the primary UK policy objective was the control of inflation through essentially the targeting of money supply growth. This met with mixed results and it was felt by Chancellor Lawson by the mid-1980s that joining the ERM would impose a low inflation discipline. Prime Minister Thatcher refused but nonetheless the Chancellor pursued a policy of shadowing the Deutschmark, a beacon of post-war low inflationary growth. However, this coincided with strong economic growth, popularly known as the Lawson boom. In 1986 the current account deficit was £2.3bn, by 1988 this had risen to £17.5bn and inflation was on the rise despite tagging the Deutschmark (DM).The exchange rate policy was abandoned and interest rates were raised from 7.5% in May 1988 to 15% in October 1989, providing support to the pound.

While the deficit started to contract inflation was stubborn and in September 1990, with a view to further deflating the economy, the UK joined the ERM at DM 3 to the pound. Even at the time this was considered too high an exchange rate. By 1991 inflation started to fall and the UK economy was in recession. UK inflation was still high relative to its main trading partners and sterling was unable to devalue sufficiently to restore competitiveness because of ERM membership. By 1992 the current account deficit had increased to £10.1bn, a remarkable level given the scale of the recession. The government wanted to cut rates but sterling was trading close to the lower end of its trading band within the ERM. An exit from the ERM and an ensuing devaluation was discounted on fears of reviving inflation. There was also a considerable amount of political capital invested in staying within the system.