My Lords, the UK does not have an exchange rate target. The Government’s macroeconomic framework includes an independent Monetary Policy Committee responsible for monetary policy that seeks to deliver price stability through an inflation target of 2% as measured by the 12-month increase in the consumer prices index. Under this framework the exchange rate is allowed to adjust flexibly.
It is a great source of disappointment to me, and I am sure to many in your Lordships’ House, that the export-led recovery which we had all hoped for has not yet occurred. Does the Minister agree that while we take no action with our exchange rates and play by the Queensbury rules, our principal trading competitors in China and Japan are not so constrained as they deliberately manipulate the value of their currencies to the grave disadvantage of our exporters? Will he join with US President Obama, who in the past few weeks has expressed similar concerns?
The UK exchange rate has fallen by about 20% since 2007. It was hoped that that would give a big stimulus to exports; it has given some, but not as much as we would have liked. On China, our trade to China over the past three years has increased by 76%. In April, for the first time, trade in goods to China reached £1 billion in a month. The access to China is proving rather better than the access to some other countries.
I congratulate the noble Lord on his answer, which seems to me for once to be entirely right. The exchange rate did collapse but it had no noticeable effect on improving the balance of payments, as he said, because the supply side of our economy has not been able to respond. Apart from that—theoretically—we do not know whether it is the balance of payments that affects the exchange rate, the exchange rate that affects the balance of payments, or whether it is the two interacting. In other words, we do not know very much about this at all. A sensible Government will therefore concentrate on trying to improve the supply side of the economy and leave the exchange rate to go where it will.
My Lords, I agree with the noble Lord. I would just say, however, that we have been successful in reorienting trade towards the BRICS countries. China trade has increased by 76% while trade with Russia has increased by 71% and trade with other countries has increased by an almost similar amount. The problem we have been up against more than anything else is that the demand in our principal market area, the EU, has been very flat and declining. There has been a rebalancing of trade, and as the EU comes out of recession later in the year we hope that we will be able to pick up exports there as well.
My Lords, it is a tool of limited use but that does not mean it is of no use at all. Obviously, you cannot have over a prolonged period all countries devaluing or competitive devaluation becomes a race to the bottom. The Governor of the Bank of England and the MPC would argue and have argued that without that devaluation our trade position would have been worse than it has been.
My Lords, is not the truth that the price devaluation of sterling can hardly be zero and that saying that price does not matter in export markets would make a nonsense of the whole argument about competitiveness? Would it not be more true to say—here I echo my noble friend Lord Peston—that when it comes to our manufacturing in particular exports, where the ratio of visible trade is 2:5 against us, we must have a policy on both sides? We must be competitive in price, which might require the pound to go down further, on that argument, but we must also give a massive shift of economic priority towards manufacturing as against the financial services industry.
My Lords, the Government have been clear from the start that we want a shift away from financial services towards manufacturing. To a certain extent, that is happening. For example, we had an export surplus in cars last year for the first time in nearly 40 years.
My Lords, does my noble friend not agree that the last thing we want is a further devaluation of sterling? Who is thinking about the interests of people who do the right thing and save, but who find that as a result of the programme of quantitative easing the returns on their savings are minimal? Pensioners who go for annuities are robbed blind because they get very little return on their savings. Surely the last thing we need is a weaker pound and the prospect of more inflation, which would hit people on fixed incomes.
My Lords, the Government have no policy in terms of the exchange rate. Equally, the MPC does not target the exchange rate. However, the Governor of the Bank of England, before he retired in recent months, said on a number of occasions that he thought that the level of sterling is, in his view, now about right.
Is it not the case that under the brilliant economic management of this Government we have got the worst of all possible worlds? We have had a devaluation and the classic cost of that—an inflation rate which is about twice the eurozone average—but we have had none of the advantages: the balance of payments has got worse; the deficit has increased not fallen; growth has been imperceptible; we have the third lowest rate of capital investment in the EU; and under the most recent growth and employment figures, it appears that productivity is either static or declining.
My Lords, does my noble friend accept that, according to macroeconomic theory, one of the drivers of a trade deficit is a government deficit, because any public borrowing tends to be offset by savings from overseas savers? Would not those noble Lords who are concerned about the trade deficit, rather than trying to manipulate the exchange rate, be better off supporting the Government’s efforts to reduce the government borrowing level?