HC Deb 14 April 1970 vol 799 cc1232-6

I shall now deal with monetary policy in the year ahead. We shall continue in 1970–71 to need a reasonably tight monetary policy; but I have also to guard against the danger that the cumulative effects of the policies followed so far might produce a greater degree of monetary stringency than is intended or necessary. On the basis of policies which will be in operation from today, my expectation is that there will be some expansion of domestic credit in 1970–71, in contrast to the contraction in 1969–70. My intention is that this expansion should be within a figure of £900 million.

I would, however, expect this to be accompanied by a different relationship, in this financial year, as against last, between D.C.E. and the money supply. This is despite the good balance of payments prospect. The relationship between domestic credit expansion and changes in money supply turns not just on the balance of payments, but on the size and nature of all external flows and on banking sector transactions. For example, some part of the additional bank lending included in the D.C.E. forecast for 1970–71 could well be matched by increases in banking liabilities to non-residents which are not included in money supply. As a result of this and other factors money supply could well rise by less than D.C.E. this year.

Given the prospect for the public sector as a whole which I have just described, this D.C.E. forecast gives a broad indication of the prospect and requirements in the fields of bank lending and government debt operations.

I approach the control of bank lending with two considerations principally in mind—the need for adequate finance for industry, and the method of control to be employed. Easy liquidity does not of itself guarantee a satisfactory investment performance either in quantity or quality. The policies which create excessive liquidity may themselves help to undermine business confidence. And if companies are so liquid as to feel themselves insulated from monetary pressures and disciplines, the quality of investment may suffer. Although company liquidity is, clearly, a good deal lower today in relation to turnover than it was in the recent past, I am sceptical about the view that it is at the moment excessively low.

I regard the results of the latest investment intentions survey as on the whole encouraging. But I must bear in mind both the need to maintain a good investment performance and the continuing pressures of the public sector surplus foreseen for 1970–71. An excessive stringency of restraint must, therefore, be avoided.

The second consideration relates to the method of control of bank lending. The main deposit banks have been living under a continuous régime of ceilings for nearly two and a half years and the other banks for a good deal longer. Though such a control is probably the most direct and effective method of achieving tight short-term restraint, the rigidities and distortions which come from it intensify with the passage of time.

I believe that it will be consistent with our main economic objectives for lending which has hitherto been subject to the ceiling restrictions to show a gradual and moderate increase over the coming year: of the order of, say, 5 per cent. over the period between now and March, 1971. It will, however, be important that the increase should be directed towards the finance of exports, and of productive investment, not only in manufacturing industry but also in agriculture, which can be expected to contribute to the balance of payments over the coming years. The construction industry can, of course, expect to benefit from such an increase in investment.

I must emphasise that this is not a general relaxation. The banks and finance houses are being asked to concentrate the increase in their lending on these purposes, and in no way to relax their restrictions upon the availability of credit for imports and import deposits, or for personal spending, other than bridging finance for house purchase. We shall continue to keep a careful watch on the way lending develops, both in total and in detail; and we shall take further restraining action if that becomes necessary. No Government can pursue an effective monetary policy without a substantial degree of control and guidance of bank lending.

But there are different methods of control. Subject to the continuance of close consultation between the authorities and the London clearing and Scottish banks, I believe that we no longer need to maintain the existing ceiling restrictions for these banks. As a result of the large Government surplus and the substantial sales of Government debt to the public over the last year, the liquidity of these banks has already come under pressure.

In these circumstances, the use of the special deposit mechanism will allow us to exert a continuing influence over the liquidity and lending capacity of the banks. Special deposits will, therefore, in future be used as freely as is required by the liquidity and actual or prospective lending of these banks. A call for special deposits should in no way be regarded as a "crisis" measure, nor, indeed, should a repayment be regarded as a signal of major relaxation.

It is against this background that I have considered the requirements of the present situation. The lending position of these groups of banks in the middle of March—the latest date for which figures are available—was reasonably satisfactory, despite a marked rise over the preceding month, which probably owed a good deal to the pressures of the taxpaying season. But it would clearly be inconsistent with the general objective I have stated if their restricted lending were to continue to rise at that rate over the coming months. At the same date most of the clearing banks were in a reasonably comfortable liquidity position for the time of year.

Given this liquidity situation, a further modest call for special deposits will underline the need for continuing restraint in bank lending. The Bank of England is accordingly calling upon the London clearing banks to place with it by 6th May special deposits equivalent to ½ per cent. of their total deposits. For the Scottish banks the call will, as on former occasions, be one half of that for the London clearing banks: on this occasion ¼ per cent. of total deposits.

With the change in the system of control, it is no longer appropriate to continue the reduction in the rate of interest on special deposits which was imposed last May. From tomorrow, therefore, all special deposits will once again carry interest closely related to the going average Treasury bill rate.

For the other banks which have hitherto been subject to ceilings we propose to rely on the cash deposit scheme which was worked out in 1967, but has never yet been brought into operation. In its present form this differs from the special deposit scheme for the clearing banks mainly in that it is more a means of making the guidance for lending effective than a ratio control. Clear guidance will be given from time to time to these banks, and a call for cash deposits would be the result of this guidance not being followed.

For the finance houses I see no immediate alternative to maintaining a ceiling control. We now ask them to keep their restricted lending within a ceiling of 105 per cent. of its level at 31st March, 1970. The report of the Crowther Committee on Consumer Credit, which we can expect to receive within a few months, will provide an opportunity for reconsidering the techniques of control over credit-giving by these and other non-bank financial institutions.

So far as the gilt-edged market is concerned, too, official strategy will be based on the general policy requirement which I have already defined. There will be substantial maturities to refinance; but I believe that there is every prospect of good sales of stock, even if not quite on the scale of the last six months, to set against the maturities.

I have been considering interest rates in relation to the general monetary policy and prospect which I have described. Given the prospects for the world and domestic economy, I do not believe that we can look for a dramatic reduction in long-term rates. But that does not preclude some flexibility in short-term rates. Our balance of payments position is strong, and United States and Eurodollar short-term rates—the international interest rates of most significance in this context—have been easing slightly down-wards in recent weeks. International developments have thus given us a little room for manoeuvre; and the requirements of domestic monetary policy do not oblige us to hold the Bank Rate at 7½ per cent.

With my approval, therefore, the Bank of England is reducing Bank Rate to 7 per cent. with effect from tomorrow.

Hon. Members

Hear, hear.

Mr. Jenkins

The House is always very kind in giving me a short rest from time to time, which I much appreciate.