one or two of you are suffering from the strong exchange rate. i only ask you to believe that we both understand and share your concern. from a macro - economic standpoint it is - as i say - important that the pace of growth of aggregate demand should slacken. but it is clearly not desirable - either in terms of sustainability or in terms of the balance of the economy - that the slowdown should simply be a result of a sharp deterioration in our balance of payments. our problem, potentially, is excess domestic demand. and that is the root of the dilemma. we have needed to tighten policy to moderate the strength of domestic demand. that has no doubt contributed to the continuing strength of the exchange rate - although you can ’ t plausibly explain anything like all of that strength in terms of relative interest rate movements here and abroad. it certainly has a good deal to do with market perceptions about the future strength of the euro. we can, and have, and i hope will, take account of the exchange rate in our tactical approach to monetary policy. but with the best will in the world, what we cannot sensibly do, is to ignore the strength of domestic demand in order to shelter the exposed sectors. that would put the whole of the economy at risk to accelerating inflation - including those sectors we were seeking to protect. and it would not be of much help to them in anything other than the short term. the monetary policy option is - as i say - not whether or not, it is sooner or later, and ultimately less or more. the elements of hope that i can hold out to you - and central bankers can never give guarantees on this kind of thing - are first, that as we move into the euro process the markets will become increasingly persuaded that the ecb will, in fact, be committed to the stability of the new currency, as i am sure it will : and, secondly, that relative monetary conditions will change as activity picks up on the continent and domestic demand moderates in this country. our present exchange rate dilemma, mr. chairman, illustrates rather well the conflicting arguments about the euro project itself. the strengthening of sterling and its effect on the exposed sectors of the economy point up very vividly the very real advantages of the exchange rate certainty across the european union area which only the euro can provide. if i were going through what many of you are now going through in your individual businesses, i think i would find the prospect of exchange rate certainty overwhelmingly

spencer dale : inflation, inflation, inflation speech by mr spencer dale, executive director and chief economist of the bank of england, at cardiff business school, cardiff, 22 september 2010. * * * i would like to thank venetia bell, rohan churm and łukasz rachel for their considerable help in preparing these remarks. the views expressed are my own and do not necessarily reflect those of other members of the monetary policy committee. introduction thank you for the invitation to speak this evening. i studied for my undergraduate degree in economics at what was then university college cardiff in the mid 1980s. i had three wonderful years in cardiff and it is a huge pleasure to come back tonight and to see so many familiar faces. although i hope some of those familiar faces will be kinder to my speech tonight than they were with my essays back then. the theme of my talk tonight is inflation. i hope that you won ’ t find that too disappointing. i fear that some of you were looking forward to a talk on more exciting topics like the financial crisis, the new responsibilities that have been granted to the bank, the speculation concerning a double dip. but i make no apology for focussing on inflation. one of the cornerstones of our economy ’ s stable and consistent growth in the 15 years or so prior to the financial crisis was the period of low and stable inflation that was achieved then. and our future prosperity will depend on our maintaining an environment of low and stable inflation. one of the most worrying comments i have heard in recent months came at a lunch of senior businessmen i attended. one of the diners suggested that the uk was returning to its old ways “ of depreciating the exchange rate and inflating its way out of trouble. ” soon after, a city circular asked “ is the mpc turning a blind eye to inflation? ” this is dangerous talk. the evils of inflation are well known. the high and volatile rates of inflation of the 1970s and 80s stunted our economic performance. companies and households were unable to budget and plan efficiently. resources were misallocated. longterm contracts were avoided. the value of hard - earned savings was eroded. this dangerous talk has perhaps been partly fuelled by the behaviour of inflation in recent years. cpi inflation has averaged close to 3 % over the past four years, significantly higher than the 2 % target and for the most part higher than the mpc anticipated. cpi inflation has been above target for 41 out of the