The aim was not to achieve a particular level of the exchange rate but to compensate for its deflationary impact. When the exchange rate weakens – as we anticipate that it will in due course – then monetary policy will at some point need to offset that influence in the opposite direction. But in the meantime we have had to manage as best we can a severe imbalance between different sectors of the economy, with the internationally exposed sectors taking a considerable hammering. Despite reasonable macro-economic stability in the economy as a whole, the environment has been anything but stable for those sectors. For a period before 1992 we sought to manage the exchange rate, initially by informally shadowing the DM and subsequently by pegging sterling within the framework of the European Exchange Rate Mechanism. Both these episodes ended in tears, essentially for the same reasons: attempting to manage the exchange rate required us to pursue macro-economic policies which were inconsistent with our own domestic macro-economic needs. In the first case shadowing the DM involved accentuating a domestic boom; in the second case our membership of the ERM, at a time when reunification required abnormally tight monetary policy in Germany, involved us in pursuing an unnecessarily restrictive monetary policy deepening and prolonging recession. In that case, too, the formal commitment made exit more difficult, the exchange rate fell very sharply, and we made a very substantial financial loss as a result of massive foreign exchange intervention seeking to defend the ultimately indefensible.
It includes intensified efforts by financial regulators particularly – at the national level but also working collectively through the new Financial Stability Forum, the Basle Committee and IOSCO for example – to improve prudential standards of financial behaviour. And it includes the provision of official financial support to countries that are pursuing sound policies – in parallel with continuing private finance, on which the risks would have been reduced both through the parallel official finance itself and through official international endorsement of the borrowing country’ s policies. In this context I think we in  5  BIS Review 54/1999  the official sector may have placed too much emphasis in international discussions on “bailing in” the private sector – which can sound ominous, even threatening – where what we really need is recognition of our mutual interest in public-private sector partnership. It is a heavy and complex agenda which is being very actively pursued in many different international groupings, involving both the industrial and emerging countries, across a broad front. We are I believe steadily moving towards consensus or many of the issues and this is “leading the way towards sustainable economic growth” into the next millennium. In the meantime we are collectively having to manage the consequences of the recent global financial disturbances and their economic after-effects. Happily we have recently been making progress on that too, particularly in many of the emerging countries here in Asia. BIS Review 54/1999  6