The Governor discusses the difficult economic environment in the United Kingdom and the calls these difficulties have prompted for lower interest rates or a lower exchange rate. He argues strongly that current conditions and policy are the necessary response to the resurgence of inflationary pressures, since only be subduing inflation can a durable strengthening of the domestic economy be achieved. Premature relaxation of monetary restraint would undermine the credibility of policy. He stresses, too, that the decision to enter the ERM should be seen as re-inforcing anti-inflationary policy through public acceptance of the disciplines that membership involves, and depends for its success on establishing a clear commitment to price stability: any readiness to lower the exchange rate would undermine belief in that commitment and so be more likely to require higher, rather than permit lower, interest rates.
The economy and ERM membership - Governors speech