Initially this appeared to be related to the impact of the global slowdown on some of the larger Eurozone economies, which seemed likely to cause them to run further below capacity than had earlier been expected. But the more recent signs are that the Eurozone economy is now picking up relatively strongly, and it is harder to understand the euro’s continuing weakness in the present context: it may just be a matter of time - for there is no doubt that the euro has considerable scope for appreciation. Taken together, Mr President, these various international developments since I was last here in Belfast have greatly complicated the task of monetary management here in the UK - in fact it has been just about the most difficult external environment that I can recall. At that time monetary policy was still aimed at moderating the pace of domestic demand growth to prevent the re-emergence of inflationary pressure - including wage pressures in the labour market. We actually raised rates by ¼% to 7½% shortly after my visit - but I promise you that was not a direct result of my visit here. But we reversed engines fairly aggressively when evidence of the effect of global slowdown on our own economy began to appear in the autumn - cutting interest rates from 7½% to 5% between October 1998 and last summer.
In the event, the damage was contained, and world economic activity is now recovering far more quickly than anyone could have expected. But, encouraging though it is, the recovery is taking place in a context of large external imbalances within the world economy and large imbalances between strong domestic and weak external demand in a number of industrial countries most notably in the US and here in the UK. The challenge now for the major industrial countries - as we discussed at the G7 meeting last weekend in Tokyo - is to secure a more balanced pattern of growth among our economies in order to help sustain the global expansion. This chain of international events has also had a major impact on the pattern of exchange rates. Many emerging countries and some transition economies saw their exchange rates fall dramatically; but there were also important effects on the relationships between the currencies of the major industrial countries. The dollar and sterling have in fact remained reasonably stable against each other for most of the time since sterling withdrew from the ERM. The yen, which had been notably weak on the Japanese recession, has since picked up strongly as the prospect of recovery in Japan improved. But the most puzzling development in the exchange markets has been the disappointing weakening of the euro since its historic introduction at the beginning of last year.