But, for what it is worth, the Monetary Policy Committee’s view – described in considerable detail in our recent quarterly Inflation Report, which I can make available to you for a remarkably modest fee if you care to get in touch with me afterwards – is that while we will  BIS Review 19/1999  6  not see much growth in the first half of this year – certainly in the internationally-exposed sectors of the economy – overall output growth will pick up on the back of stronger domestic demand as we move towards the Millennium to around trend or above from the second half of next year. We can’t of course altogether rule out an actual downturn in total output over the next few months, though the odds are against that for the economy as a whole. And we are reasonably confident that the slowdown will be relatively mild and short-lived – certainly compared with equivalent periods in the past, for example at the beginning of the 1980’s and 1990’s. The good news is that we expect inflation to remain close to the Government’s 2½% target over the next two years, which should allow the relatively steady growth we have seen in the overall economy since 1992 to resume on a sustainable basis. Within this overall picture, we are still confronted with the difficult problem of imbalance between external and domestic demand and the sectoral and regional stresses that this implies.
Financial markets appeared at that time to take the view that European Monetary Union was being driven increasingly by political determination – even if that meant softening the interpretation of the economic convergence criteria written into the Maastricht Treaty. They concluded that this implied a broad rather than a narrow initial euro membership; and that that, in turn, implied a weak rather than a strong euro. But whatever the reason – and whether it was valid or not – the effect of sterling’s appreciation was to introduce a pronounced imbalance into the UK economy. It dampened net external demand, and had a restraining influence on cost and price inflation, at a time when domestic demand growth remained unsustainably strong, and when we were approaching full capacity. We understood very well that, after a relatively favourable exchange rate environment, following our exit from the ERM, the abrupt appreciation meant that the internationallyexposed sectors of the economy, including large parts of manufacturing industry, were now suddenly confronted with much harsher trading conditions. That, as I say, had a dampening  BIS Review 19/1999  4  effect on the UK economy and on inflation. But we couldn’t just rely on that to cool the economy for us. Clearly at some point the exchange rate would stop appreciating, and this external dampening effect would have worked its way through. In the meantime, we needed to slow the rate of growth of domestic demand sufficiently to avoid overheating in the economy as a whole.