in domestic demand would keep our economies operating closer to capacity than in the eurozone. and the yen, which had been notably weak on the back of japanese recession, has subsequently picked up as the prospect of economic recovery there improved. it is the strength of sterling ’ s exchange rate which gives rise to the most vociferous complaints. i am only too well aware that for many of the internationally - exposed sectors of the uk economy most of agriculture, much of manufacturing industry, and some services sectors - these developments came as a series of hammer blows - of varying intensity depending on the particular international orientation of the business. companies trading with, or competing against, much of east asia, but also other emerging and transition economy markets, saw their markets collapse and prices fall dramatically given the massive falls in many partner - country exchange rates. trade with the eurozone - by far our largest trading partner - was also adversely affected, until recently, by sluggish domestic demand in the major continental countries and by the weakness of the euro. and even those who look mainly to the united states - where both the market and the currency relationship have been more stable - faced intensified competition from the rest of the world. these effects were not, of course, peculiar to scottish businesses. they applied equally to all similarly internationally - exposed businesses throughout the uk. each region has its own particular business characteristics so that some were affected more than others - with some english regions worse affected than the overall economy here in scotland. but the effects were just as damaging to similar businesses wherever they were located, so that the differential impact was felt within regions throughout the uk not just between them. these cries of pain from the most severely affected businesses and sectors right across the uk i really do understand. the question is what can we do about it through the operation of monetary policy? the problems - as i have explained - derive essentially from developments abroad, and there is not much that we can do directly about them, although both the bank and the government are very actively involved in the wider international debate on how to bring about greater stability and better balance in the global economy. of course we take full account, in our forecasts and in our policy judgements, of the implications of the international environment for our own economy. that is why we moved aggressively to cut interest rates from the autumn of 1998 and early last year. even though we could not change the international environment ( and as i say the exchange rate actually rose despite our interest rate cuts

), we could cushion its negative effect on the economy as a whole by providing an offsetting stimulus to the domestic economy. had we not done so, we might well have suffered recession in the uk. but the hard question for us is could we - and should we - attempt to shelter internationally - exposed businesses even if that were to mean putting our objective of sustained low inflation at risk. in fact i ’ ve not heard anyone argue openly for that - and i would be surprised if they did. the reality is that if we were to put the economy as a whole at any significant risk of accelerating inflation notwithstanding our mandate - we would not succeed in providing the intended protection to the internationally - exposed sectors other than possibly in the very short term ; and in the medium to long term our overall economic performance would almost certainly be worse. the more hopeful news is that we have more recently seen strong signs of recovery - of both economic activity and exchange rates - in a number of emerging markets and transition economies. and we are seeing a strengthening of domestic demand and of output in the eurozone, where the currency is commonly acknowledged to have considerable potential for appreciation. these trends, and the extraordinary efforts of uk businesses themselves to cope with the hostile international environment, are already resulting in a stronger net external trade performance. that in turn is contributing to the recovery, particularly in manufacturing output growth and to the more encouraging news in some recent surveys. to the extent that this improvement in external demand persists, it will help to ease the exceptional pressures on the most internationally - exposed sectors, and contribute to a better balance within the uk economy. but it needs, of course, to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a year ago - if we are to maintain overall stability. that essentially is why interest rates have had to rise since last autumn. mr chairman, most people, as i say, accept in principle that sustained monetary stability is good for the economy as a whole in the longer term - though it is accepted with varying degrees of enthusiasm by adversely affected sectors at any particular time. but there is, nevertheless plenty of room for debate about the operation of monetary policy in practice. specifically at present the mpc is often accused of being overzealous - and it is suggested that we don ’ t in fact need to raise interest rates at this point in order to achieve the inflation target. that is a more technical question. changes in interest rates take