§ I propose next to describe to the House how monetary policy will operate in the year ahead. I shall, nevertheless, do so as briefly as I can. The technically minded will find ample solace in the lapidary prose of the Red Book.
§ Ever since the collapse of the Bretton Woods system of fixed exchange rates in 1971, the need to control the money supply has been accepted world-wide. In this country, published targets for monetary growth were initiated by my predecessor in 1976, the year in which he had to seek help from the IMF. Then, as now, monetary control was supported by progressively lower public borrowing. I am sure that my predecessor was right to be persuaded of the need for monetary and financial restraint, to persuade individuals and companies alike that inflation would come down.
§ The medium term financial strategy which the Government launched two years ago is an extension of this approach. It has helped us to reduce inflation, and will continue to do so. We now have a real prospect of sustainable recovery. It is clearly right to maintain the strategy. Of course, it is right to adjust, in the light of experience, the way we pursue it. But maintain it we must. For it establishes the financial framework within which day-to-day policy decisions are taken.
§ In last year's Budget speech, I emphasised that no single measures of money can fully describe monetary conditions—they must be assessed in the light of all the available evidence. And that remains the basis of our policy.
§ As intended, the overall effect of policy in 1981–82 has been to maintain downward pressure on inflation. £M3 has 733 grown faster than the target set a year ago. This was due partly to the Civil Service strike. It has been affected, too, by structural changes in the market place—such as the rising market share of the banks—which could have long-term effects. The growth of the wider measures of money probably also reflects greater demand for liquid assets as a medium for saving. This, too, could last for some time. So, though the stock of broad money is higher than originally expected, our judgment is that this is consistent with maintaining the steady pressure needed to achieve a downward trend in inflation.
§ Certainly the evidence as a whole does not suggest lax monetary conditions. As in several other countries, the narrow aggregates have grown more slowly than the wider ones. The effective exchange rate has been relatively steady since the autumn. Interest rates have been high—both in nominal and in real terms. The price of some important assets—for example, houses—has been constant or falling.
§ I have taken account of these factors in setting somewhat higher ranges than were suggested for £M3 in last year's Red Book. The target range for 1982–83 will be 8 to 12 per cent. This adjustment in the monetary target does not imply any relaxation of purpose. On the contrary, it is a recognition of the pace of progress thus far, and, in the light of that, our judgment that the new ranges will be consistent with continued progress against inflation.
§ The new target represents a realistic restatement of our determination to maintain a responsible monetary policy. It should be consistent with growth of money GDP at 10 per cent. a year, with continued progress against inflation, and with a strengthening recovery of the real economy.
§ We shall continue to monitor a range of indicators. To make more explicit the way in which we do this, the ranges that I have just announced will apply to both the broad measures of money—£M3 together with PSL2—and the narrow measure, M1.
§ The exchange rate also normally gives useful information on monetary conditions. For while the Government have no target for the exchange rate, its effect on the economy, and, therefore, its behaviour, cannot be ignored.
§ Evidence on all these variables will continue to be taken into account. Policy dicisions will be aimed at maintaining a monetary environment conducive to the reduction of inflation.
§ Targets for the years after 1982–83 will be set nearer the time. Slower monetary growth is central to the medium-term financial strategy. The path for further reductions in the rate of money growth from year to year is illustrated in the Budget Red Book. The ranges have been constructed on the assumption that there are no major changes in the exchange rate from year to year.
§ What I have just described provides the framework for continuing the conquest of inflation. We are winning that battle and are determined to see it through.