I see that the PM has been talking about financial economic variables again – this time it is the exchange rate. Now he says it isn’t a big deal as he didn’t say too much – which is true. But nonetheless, he is PM, he isn’t supposed to say anything about the direction of monetary policy – which includes interest rates.
Take the current example, there are multiple ways it could be taken the wrong way:
- Foreign countries see it as “protectionism” as he is trying to talk down the dollar,
- Foreign traders begin to place some weight on his comments – thereby reducing the effectiveness of monetary policym
- Businesses and households increase their belief that the government will influence monetary variables, reducing the efficiency of monetary policy (especially regarding expectations)
I realise that it seems like a bunch of arbitrary complaining – but there is a fine line between pointless talk on the exchange rate and interest rates and damaging market signals by creating “false information”. The information signal, and its impact on expectations, is just so so important in the modern economy.
Treasury needs to explain this – they need to say that if he keeps discussing interest rates and the exchange rate he will simply reduce the effectiveness of our credit markets and monetary policy.
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