HC Deb 23 November 1964 vol 702 cc913-8
The Chancellor of the Exchequer (Mr. James Callaghan)

As the House is aware, the Bank of England has today, with my approval, raised Bank Rate from 5 per cent. to 7 per cent.

The purpose of this move is to place beyond any doubt the Government's determination to maintain sterling at its present parity, and thus to bring to an end the outflow of funds which has been taking place. The Bank of England has been in close touch with other Central Banks, with the object of maintaining co-operation designed to counter speculative movements.

The Government expect a progressive improvement in the balance of payments as some of the factors adversely affecting both the current and the capital account in 1964 lose their force, and the measures already taken by the Government make their impact. The exceptional step of raising Bank Rate by two points will reinforce these measures and will give time for them to operate.

The long-term improvement in the balance of payments will come from a reshaping of the economy through the measures outlined in the Government's statement of 26th October. These will lead to the necessary expansion of exports and the curtailment of imports. Prominent amongst these measures is the working out with both sides of industry of an effective policy for prices and incomes. Discussions on this subject have already made good progress and are being pursued urgently.

In taking the decision to raise Bank Rate, the Government have weighed most carefully their responsibility as custodian of one of the world's two reserve currencies with their commitment to promote a healthy and steadily expanding economy at home. They are determined to carry out both these tasks.

Mr. Maudling

Tomorrow, we will be debating the Finance Bill and I believe that we will have an opportunity of discussing the financial situation then. In the meantime, may I ask the right hon. Gentleman two questions: first, is he aware that there will be general support for the Government's determination to maintain sterling at its present parity; and, secondly, is he aware that the speculative movements to which he refers, both by their nature and timing, clearly derive from the recent actions of the Government, including, in particular, the Budget, the taxation proposals and the inept handling of the surcharge?

Mr. Callaghan

I thank the right hon. Gentleman the former Chancellor for what he had to say about maintaining the parity. I must remind him that he told us that we had inherited his problems and his diagnosis. The right hon. and learned Gentleman the Member for St. Marylebone (Mr. Hogg), who I am glad to see in his place, said this morning in a statement that the Bank Rate should have gone up at least four weeks ago. They had better get together to clear it up.

Mr. Grimond

Would the right hon. Gentleman answer two questions? Is it true, first, that the United States was reconciled to the 15 per cent. surcharge on imports by some assurance that interest rates would not be increased? Secondly, as this increase of Bank Rate, combined with the uncertainty caused by some of the statements made during the Budget, is likely to make a very effective stop on investment, will the right hon. Gentleman now consider publishing a White Paper, as he has already indicated some things which will take place in the Budget next spring, showing in rather more detail how the corporation tax and the capital gains tax are likely to work? Surely it is now essential to get the economy going again as soon as we can and not simply to announce stop measures without giving any intention of what the go measures are likely to be.

Mr. Callaghan

The American Government have, I believe, put out a statement today saying that they understand the circumstances in which our Bank Rate is being increased. No assurances were, of course, given to the American Government before their own election about what would happen in relation to the Bank Rate. We are both free to move our Bank Rates in the way we think appropriate.

As to the Budget, I think that that has been grossly misrepresented abroad, including by some hon. Members of the Opposition. [HON. MEMBERS: "Oh."] I do not know whether the Opposition are against raising the old-age pensions, because this has been the principal subject of ill-informed criticism abroad. But what has not been noted abroad, and what hon. Members opposite could help with, is that the finance for the old-age pensions has also been raised by means of an increase in the standard rate of Income Tax.

Mr. Shinwell

Can my right hon. Friend furnish any information to right hon. and hon. Members opposite about how frequently the previous Government, over a period of 13 years, raised or lowered Bank Rate? Can he tell us, at the same time, the last occasion on which the previous Government raised Bank Rate to 7 per cent.?

Mr. Callaghan

I believe that there were about 20 movements of Bank Rate by the previous Administration. The last occasion was in July, 1961, when the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) raised it to 7 per cent. on an occasion, of course, when the current and capital deficit was far smaller than that which we inherited from them.

Mr. Geoffrey Lloyd

Is the Chancellor aware that the motor industry depends on loans of many millions of pounds to finance the stocking up of motor cars during the winter months of low demand, and thus keep production and employment going on a good level during these months? Does he realise that this sudden increase could have a very serious effect on these arrangements, and would he consult the industry in order to avoid dangers to employment and production, especially in the Midland area?

Mr. Callaghan

It was the unanimous conclusion of the Radcliffe Committee that an increase in Bank Rate had its first immediate effect on the international situation. I think that the whole House will want to feel that speculators against sterling have burnt their fingers. It this is the case, and if this is the position, I hope it will not work through to the domestic economy, for reasons that will be obvious to the House. My right hon. Friend the First Secretary will be having discussions with these industries and others that are affected in this way.

Mr. Allaun

Could not this step have been avoided if other action had been taken during the summer to reduce the deficit? Further, will my right hon. Friend take every step to avoid hurting the house building industry?

Mr. Callaghan

I think that the country is quite clear that the delay in holding the election, and the failure to take steps earlier, or, if the then Government meant to delay the election, their failure to take steps in advance of that election, has made the situation much more difficult today. I do not grumble about that; we will deal with it—and we will not be pushed around by anybody in dealing with it. Further, we are urgently considering whether some means can be found of mitigating the severity of the increase in Bank Rate on the housing programme.

Mr. Maudling

Will the right hon. Gentlemen say what steps he has in mind should have been taken, and whether he advocated them at the time?

Mr. Callaghan

Throughout last summer—if the right hon. Gentleman wishes to keep this up—he, and particularly his right hon. Friend the Leader of the Opposition, denied that there was any need to take steps of this sort—[HON. MEMBERS: "Answer."] I say this to the right hon. Gentleman—[HON. MEMBERS: "Answer."] He constructed our financial economy like a house of cards, and the first whisper of truth blew it down. There is nothing to be—[HON. MEMBERS: "Answer the question."]—particularly proud of in that record, after 13 years.

Mr. James Johnson

Can my right hon. Friend tell the House what effect the Government's action has had on the foreign exchange markets?

Mr. Callaghan

I read on the tape that a number of speculators have burnt their fingers.

Sir C. Osborne

Whilst wishing, from the national point of view, that these steps help sterling considerably, may I ask why Bank Rate was not put up last Thursday? What has happened between last Thursday and this morning to make necessary what appears to be a panic measure?

Hon. Members


Mr. Callaghan

We raised Bank Rate at the moment we thought was most appropriate for the national well-being.

Several Hon. Members


Mr. Deputy-Speaker (Dr. Horace King)

Order. This discussion is getting suspiciously like a debate, and there is no Motion before the House.

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