, causing unwarranted movements in the real exchange rate. that, of course, may be an important influence on domestic costs and prices ; it may affect the relative competitiveness of domestically and foreign - produced goods and services leading to changes in the net external trade position, affecting aggregate demand in the domestic economy. so the insulation provided by a floating exchange rate may prove to be more apparent than real. the uk has been floating since 1992. for some years we experienced very little tension between our domestic and external policy needs. but then, from the autumn of 1996 we saw a sudden appreciation of some 20 - 25 % in our effective exchange rate against the core european currencies, and seemingly, largely related to uncertainties about the future characteristics of the european single currency. whatever the reason the strengthening of the exchange rate had a dampening effect on the domestic price level, and a subsequent deterioration of our trade balance ( accentuated over the past year or so by the global economic slowdown ) reduced aggregate demand in the economy. monetary policy accordingly needed to be less restrictive than would otherwise have been appropriate to offset these effects on domestic demand. the aim was not to achieve a particular level of the exchange rate but to compensate for its deflationary impact. when the exchange rate weakens – as we anticipate that it will in due course – then monetary policy will at some point need to offset that influence in the opposite direction. but in the meantime we have had to manage as best we can a severe imbalance between different sectors of the economy, with the internationally exposed sectors taking a considerable hammering. despite reasonable macro - economic stability in the economy as a whole, the environment has been anything but stable for those sectors. for a period before 1992 we sought to manage the exchange rate, initially by informally shadowing the dm and subsequently by pegging sterling within the framework of the european exchange rate mechanism. both these episodes ended in tears, essentially for the same reasons : attempting to manage the exchange rate required us to pursue macro - economic policies which were inconsistent with our own domestic macro - economic needs. in the first case shadowing the dm involved accentuating a domestic boom ; in the second case our membership of the erm, at a time when reunification required abnormally tight monetary policy in germany, involved us in pursuing an unnecessarily restrictive monetary policy deepening and prolonging recession. in that case, too, the formal commitment made exit more difficult, the exchange rate

and complex agenda which is being very actively pursued in many different international groupings, involving both the industrial and emerging countries, across a broad front. we are i believe steadily moving towards consensus or many of the issues and this is “ leading the way towards sustainable economic growth ” into the next millennium. in the meantime we are collectively having to manage the consequences of the recent global financial disturbances and their economic after - effects. happily we have recently been making progress on that too, particularly in many of the emerging countries here in asia.