One of the reasons I got involved in politics over twenty-five years ago was the experience of the ERM debacle and the effect that had on businesses and homeowners up and down the country including my own family business. It left me with a painful appreciation of the fragility of economic credibility and also the devastating effects of high-interest rates.
During the early 1990s, John Major decided to attempt to manipulate the markets and lock the value of the pound against other European currencies in what was a forerunner of the single European currency. The Bank of England was expected to change interest rates not to target the supply of money or inflation but to try to massage the value of the pound. The project was a disaster which led to unsustainable interest rates and terrible damage to British industry until the decision was taken to finally abandon it and the economy flourished. It shaped my views on the European Union and banks which have stayed with me since.
This week Sterling and interest rates have been in the news again in a way we have not seen for some time and perhaps assumed we wouldn't see again. The trigger for the current turbulence was the reaction of the markets to last Friday's autumn statement from the new Chancellor of the Exchequer, Kwasi Kwarteng. During the recent Conservative leadership campaign, there was a lot of discussion about the right economic policy as the whole world attempts to deal with the aftermath of the pandemic. As I set out in this column on several occasions, I supported Rishi Sunak because I thought he had the best judgement, and his analysis was right. The memory of high-interest rates and their damaging impact still played on my mind. If the government borrows unsustainably then the markets lose confidence and interest rates rise. However, the alternative approach set out by Liz Truss prevailed.
Liz Truss and her Chancellor now have an urgent task to calm the situation and restore confidence. They need to articulate why they believe that borrowing money to cut taxes will boost growth and that the deficit will come back under control. The last Prime Minister to pursue such a policy was Ted Heath in 1972 which worked for a short period but was seen not to be a success overall. It could be different this time in a different context, and this must be explained. There needs to be serious economic analysis to underpin their approach and they need to make a conscious effort to reconcile the policies on tax and spending with the remit that the Bank of England has to manage inflation and ensure that the policies work in concert. It has been a difficult week, but the important thing now is to get confidence restored and quickly.
