§ The framework within which that sound and prudent financial management has been pursued, and will continue to be pursued, is the Government's medium-term financial strategy. It provides as firm a guarantee against inadequate money demand as it does against excessive money demand. At the heart of the MTFS lies the objective of steadily reducing the growth of total spending power in the economy, as measured by GDP in cash terms, at a pace that will gradually squeeze inflation out of the system while at the same time leaving adequate room for sustained growth in real output—
§ Mr. Lawson
—and that we have done.
Over the past six years the rate of growth of money GDP has been halved, and a further significant reduction 170 is envisaged for 1986–87. This has brought about a combination of low inflation and steady growth. We shall continue to maintain steady downward pressure on inflation. That means, above all, controlling the growth of money in the economy.
Last year I set target ranges of 3 to 7 per cent. for narrow money, MO, and 5 to 9 per cent. for broad money, sterling M3. During 1985–86, the targeted measure of narrow money has grown towards the bottom end of its range. The target range for next year will be 2 to 6 per cent. as foreshadowed in last year's MTFS.
For broad money it has been clear since the autumn that the range was set too low. Throughout the 1980s—and in sharp contrast to the 1970s—broad money has grown far faster than money GDP. Experience has demonstrated that this has not posed a threat to inflation. This rapid growth largely reflects the increased attractions of holding interest-bearing deposits, at a time both of low inflation and high real interest rates, and of innovation and liberalisation in the financial system. Accordingly, I am setting next year's target range for broad money well above that indicated in last year's MTFS, at 11–15 per cent. Given the experience of the past six years, I believe this is not only a more realistic range, but one which is wholly consistent with the further decline in inflation which I intend to achieve.
Short-term interest rates are the essential instrument of monetary policy. Changes in interest rates have a reasonably quick and direct effect on narrow money, as they do on the exchange rate. Their effect on braod money is more complex and much more delayed. As explained in the Red Book, there is thus an important difference in the operational significance of the targets for narrow and broad money. Needless to say, I shall continue to monitor the evidence of other financial indicators, of which the most important is the exchange rate. I will say no more about monetary policy—[HON. MEMBERS: "Hear, hear."]—except to repeat what I said at the Mansion house last Autumn: that while financial liberalisation and innovation have inevitably made the process of monetary management more complicated, there has been no change whatever in the essence of policy. The Government continue to attach the highest priority to sound money.