Sir,
Your editorial “Britain’s current account deficit opens wide” (November 3) seems to offer a counsel of despair. While it warns that the deficit has now reached a level that could provoke a sterling crisis, it suggests that policymakers should watch the shortfall but not target it.
You might have done a greater service had you reminded us that a change in the mix of monetary and fiscal policies might help to reduce the current account deficit to a more sustainable level without jeopardizing the attainment of the inflation and economic growth targets.
That is to say, a tightening of fiscal policy might help to increase the level of national savings needed to reduce the current account deficit at the same time that a relative loosening of monetary policy might yield lower interest rates and a more depreciated exchange rate that would otherwise be the case. A more depreciated exchange rate in turn would facilitate the needed shift in resources to the economy’s traded goods sector.
In the current UK context, should aggregate demand need to be curbed to avoid inflationary pressures, the UK Treasury and the Bank of England might be advised to co-ordinate policy to deal with such pressures by accelerating the pace of fiscal consolidation and by delaying the start of the interest rate hiking cycle.
Such an approach would seem to be particularly indicated at a time when both the European Central Bank and the Bank of Japan appear to be poised to ramp up their quantitative easing policies, which might be expected to further depreciate the euro and the Japanese yen.
Desmond Lachman, American Enterprise Institute, Washington, DC, US
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