Peter Jackson column

Dec 16 2004 By Peter Jackson, The Journal

Four or five years ago there was much complaining from the manufacturing sector over the strength of sterling.

The relatively high pound at that time was making our exports too expensive and therefore damaging to British industry.

This led to pressure in some quarters for us to join the euro. Since then, with the relative rise of the euro and a healthy UK economic performance, the European currency has become, in political terms, a dead duck - at least for now.

However, the level of sterling is causing concern again. The CBI has warned that a strengthening pound and poor exports mean manufacturing's forecasts for production have slipped to the lowest levels for more than 12 months.

This echoes a similar warning from the EEF some weeks ago.

We are by no means in trouble yet, with healthy order books and rising margins, but manufacturing takes the long view and dark clouds are seen on the horizon.

This is part of the problem I outlined the other week - that of the weakening dollar.

It may be good news for those planning a trip to Disneyland, but for the economy, it spells danger.

Once, if the pound was too strong, the Chancellor of the Exchequer could respond by cutting interest rates and bring the rate down.

And, with probably less than six months to go to a general election, that is precisely what he would be doing.

Happily however, Gordon Brown has farmed the management of interest rates out to the Bank of England and the Monetary Policy Committee's brief is to control inflation, not the exchange rate.

Here the news is not good for manufacturing, as inflation is on the way up, with November's consumer prices 1.5pc higher on an annual basis, up from 1.2pc the previous month.

And when inflation is on the way up, the Bank brings it down, not by cutting interest rates, but by raising them - or more likely at the moment by holding them steady.

All of which, while still in the category of a slight correction on the tiller, could reignite the issue of which region interest rates are set for - the prosperous, house inflation prone, service sector South-East, or the still recovering, relatively low house price, manufacturing North?