§ Within the MTFS, the central role is played by monetary policy, for it is by controlling the growth of money in the economy that the Government are able to influence the growth of money demand. Last year I set target ranges of 4 to 8 per cent. for narrow money and 6 to 10 per cent. for broad money. Over the 12 months to mid-February, the targeted measure of narrow money grew at around the middle of its range, and that of broad money at just below the top of its range.
For next year, I shall be retaining the same two target aggregates. I attach equal importance to both. The target ranges for 1985–86 will be those indicated in last year's MTFS—that is to say, a reduction in monetary growth of 1 per cent. in each case.
There are those who argue that if we stick to sound internal policies, the exchange rate can be left to take care of itself. In the long run that may well be true, but significant movements in the exchange rate, whatever their cause, can have a short-term impact on the general price level and on inflationary expectations. This process can acquire a momentum of its own, making sound internal policies harder to implement. So benign neglect is not an option.
That is why I have repeatedly argued that it is necessary to take the exchange rate into account in judging monetary conditions. There is no mechanical formula which enables us to balance the appropriate combination of the exchange rate and domestic monetary growth needed to keep financial policy on track, but a balance still has to be struck, and struck in a way that takes no chances with inflation.
There can be no doubt about the Government's commitment to maintain monetary conditions that will continue to bring down inflation. Short-term interest rates will be held at the level needed to achieve this.