The strong exchange rate gave us somewhat more time than we would otherwise have had to bring about this domestic slowdown – it meant that monetary policy did not need to be tightened as aggressively as would have been necessary otherwise. But we could not avoid tightening policy altogether, even though we realised that this would be likely to increase the pressures on the internationally-exposed sectors, because in anything other than the short term that would have put the whole economy – including the internationally-exposed sectors we were trying to shelter – at risk of accelerating inflation. I would remind you that right up until the summer of last year we were seeing signs of increasing pressures in the labour market, even in the manufacturing sector – reflected in increasing skills shortages and recruitment difficulties, in the employment/unemployment data, and in gradually increasing pay settlements. The uncomfortable reality, as I’ve said very often before, is that monetary policy can only target the economy as a whole – it can’t seek to protect individual firms, or sectors, or regions, however much we might wish it otherwise. That – as I’ve discovered – is not exactly a popular idea, but there’s no question that that is the reality of it. Over the past year the world – and I mean the world – has changed very substantially.
Now a lot of people think that, because our objective is defined in terms of an inflation target, controlling inflation is all that we at the Bank of England actually care about. We’re often described as a lot of “inflation nutters”, or even as “pointy-headed industrial hooligans” who don’t care at all about real economic activity or jobs – and I don’t think these epithets are necessarily intended as terms of endearment! That view I have to tell you is profoundly and fundamentally wrong. 1  BIS Review 19/1999  The implication, of those who take that view, is that they think there is a trade-off between inflation and the rate of economic growth; they think that if only we would let up a bit on controlling inflation then we could all enjoy higher activity and lower unemployment and rising living standards, which are, of course, the really good things of economic life. At the very least, they say, if you were a bit less manic in your pursuit of low inflation, we could avoid some of the worst damage that is currently being inflicted upon agriculture, upon large parts of manufacturing, and even some service sectors. And that might even be true for a time. The trouble is that, in anything other than the short term, it would be likely to mean more rather than less economic damage, and lower rather than higher growth and employment.