Leading article: You can't buck the market

TEN YEARS is a short time in politics. It was in March 1988 that the pound was worth 3 Deutschmarks, and there were heavyweight politicians wanting the Treasury to do something to keep sterling from rising. But it is the differences between now and then which are most unexpected and illuminating. Such are the ironies and inversions that it is as if the gods have been playing games with the politics of the currency.

Ten years ago, it was the Chancellor of the Exchequer himself, Nigel Lawson, who wanted to keep the pound down and repeatedly cut interest rates to do so. When that did not work, he resorted to intervention in the foreign exchange markets, selling pounds in order to try to drive the price down, prompting the Prime Minister, Margaret Thatcher, to tell the House of Commons: "There is no way in which one can buck the market."

Now, a Labour Prime Minister and Chancellor are united, and they agree with her. It was John Redwood, the one-time arch-Thatcherite, who demanded on Any Questions at the weekend that the Chancellor "do something" about the high pound. And it was a Labour minister, Derek Fatchett (the Foreign Office's Mr Cool, as it happens), who spotted that the monetarist Mr Redwood could not mean that interest rates be cut. He must therefore want to put up taxes, and Mr Fatchett demanded to know which taxes the Tories wanted to raise. How the gods must have laughed.

Mr Redwood is not the only one, of course. More predictably, Mr Brown is said to be under pressure from John Prescott, David Blunkett and Margaret Beckett to "do something" to get the pound down. Their motives are very different from Mr Lawson's in the Eighties. They do not like a strong pound because it is hurting exporters and threatening British jobs.

Mr Lawson, on the other hand, wanted to keep the pound at DM3 because he was running an undeclared exchange rate policy. Linking the pound to the German currency was supposed, in the long term, to act as an anti- inflationary discipline on the chronically inflation-prone British economy.

Ten years on, and Mr Lawson's son Dominic argues cogently (in yesterday's Sunday Telegraph) that the exchange rate should find its own level. And so it should.

The Government cannot and should not have a policy for the value of the pound. Those who argue that Mr Brown should "do something" about the high pound can only mean that interest rates should be lower. Tax rises or other quick fixes to dampen domestic demand are politically impossible and in any case are little better than pushing on the famous string when it comes to influencing traders on telephones.

But it is no longer in the Chancellor's power to cut interest rates - or to raise them. That is a technical decision which will be made by the Monetary Policy Committee (MPC) of the Bank of England when it meets this week.

The MPC's job is to "deliver the Government's inflation objective", which is 2.5 per cent. As Gavyn Davies points out on page 17, it is explicitly not allowed to have regard to the exchange rate, jobs or growth, if these might prejudice the inflation target. If any of the Chancellor's colleagues want lower interest rates, they either have to argue that the Bank of England is in danger of undershooting its inflation target - getting it below 2.5 per cent - or that they should not have made the Bank independent.

The MPC's own forecast for inflation is already that it will exceed the 2.5 per cent target in two years' time. Not by much, so the case for a rate rise is not strong, but the risk of letting inflation loose if rates are cut now is just too great.

It was always going to be at times like this that the reality of an independent central bank was going to run up against some of Old Labour's deeper instincts.

There is one other thing the Government could do to influence the level of the pound, however, and that is to be more aggressive about its intention to join the single European currency. The pound is not historically strong against the dollar, at $1.65; it is the Deutschmark and the franc which are weak because the foreign exchange markets are nervous about the euro. But, even if Tony Blair's malign alliance with Rupert Murdoch allowed it, a stronger declaration of intent might not work. There still has to be a referendum on the euro and, fundamentally, the pound is up because the British economy is strong relative to its neighbours'.

In the end, until such a time as the market for pounds is abolished, by joining the euro, it cannot be bucked.