In a speech delivered at the Warwick Economics summit this past weekend Bank of England policy-maker Martin Weale - an outspoken 'dove' - spoke at length on the different mechanisms by which the United Kingdom's current account deficit might be reduced.

In particular, Mr.Weale discussed the circumstances under which the "current exchange rate" might come under pressure and what the implications might be for the Bank's monetary policy.

In particular, at a given point in his speech he explained that "the final, and perhaps most natural, means of resolving the problem is for the nominal exchange rate to fall."

As well, in his concluding remarks he highlighted the historical importance which a net surplus of investment income has for the country's external accounts. As this has eroded, he went on to say, the overall deficit has increased to around 3 ½% per cent of gross domestic product (GDP), a level higher than before the depreciation.

"Unless we continue to enjoy capital gains this points to a marked increase in United Kingdom net external debt at the current exchange rate," he added.

As regards the implications of any depreciation in Sterling, he said that "To sum up, I certainly see that there would be a strong case for treating the effects [on inflation] of any further depreciation similar to that experienced in the last few weeks in the same way.

To do any different would be to veer towards deflation as a means of restoring external equilibrium. But I should stress that this point is quite different from saying that I would be unconcerned about the effects of a sharp depreciation [in Sterling] on prospects for inflation."

AB

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