Mr. George gives an address on recent changes in the international financial and economic environment Speech given by Mr E A J George, Governor of the Bank of England, at a Dinner with the Lord Mayor for Bankers and Merchants of the City of London on 10 June 1999. My Lord Mayor, Mr Chancellor, My Lords, Aldermen, Mr Recorder, Sheriffs, Ladies and Gentlemen. When we were last here for this splendid occasion I suggested that we were living in a dangerous international financial and economic environment. These were strong words for a central banker – but perhaps not strong enough. That environment rapidly became worse through the autumn, so that by around the time of the IMF Annual Meetings in October there was a good deal of talk about global financial meltdown and impending world recession – which was not simply journalistic hyperbole. Since that low point things have certainly improved. The hectic scramble for financial asset quality and liquidity following Russia’s default and the near collapse of LTCM – an exceptionally highly geared hedge fund – failed to uncover fatal weaknesses elsewhere in the financial system, and lenders and investors have gradually regained some of their appetite for risk. Fears of a general credit crunch in major industrial countries quickly receded; and sentiment towards the emerging markets has improved, with growing evidence of recovery in the original Asian crisis countries and a better than expected outcome in Brazil.
We are an integral part of the global economy. And we had particular problems of our own. In our case, in marked contrast to the Eurozone, and despite the dampening effect of an already exaggeratedly strong exchange rate, we were confronted, in the early part of last year, with the prospect of excess demand and accelerating inflation, and policy had been tightened to head that off. But we, like others, were then hit in the autumn by the renewed turmoil in the global economy. That caused a sharper fall in external demand, but it also caused both business and consumer confidence to plummet – so that prospect of moderate overall slowdown we’d been deliberately trying to engineer quite suddenly threatened to turn into an unnecessarily sharp downturn, with the risk that the rate of inflation would fall significantly below the Government’s 2½% inflation target. So we promptly reversed gear – cutting interest rates very sharply – by 2½% to as low as they have been since the mid-1960s. That has helped both business and consumer confidence to recover – from very low levels – and the prospect now is that, after a pretty flat economic performance either side of the year-end, overall demand and output growth will pick up steadily to around trend by the middle of next year. But, despite these interest rate cuts, the pound has actually strengthened – notably against the euro – in part, as I suggested earlier, because of weaker overall demand pressure on the Continent.