Sterling Balances (Hansard, 27 January 1977)

§ 1. Mr. Wyn Roberts
asked the Chancellor of the Exchequer if he will now make a further statement on the position of sterling balances.

§ The Chancellor of the Exchequer (Mr. Denis Healey)
The main features of the new facility for official sterling balances are as described in my statement on 11th January. But many details, relating in particular to the operation and administration of the facility, remain to be settled. These are being worked out at present and I hope to be able to make further information available by about the middle of next month. Details of the terms and other aspects of the foreign currency bonds that are to be offered to official holders will also be made available at a later stage.

§ Mr. Roberts
I am grateful for that reply. In view of the wide disparity between interest rates here and elsewhere in the world and the present inflow of hot money, is the Chancellor concerned about the situation, and what does he intend to do about it?

§ Mr. Healey
It is fair to remind the House that a great deal of the inflow—and it is not possible at this stage to identify it—is an unwinding of leads and lags and the return to Britain of money which has been involved in the financing of third countries' trade which is now terminated. There is a Question on interest rates from my hon. Friend the Member for Gloucestershire, West (Mr. Watkinson) later on the Order Paper, 1676 so I shall confine myself to saying that the disparity is reducing week by week.

§ Mr. Watkinson
Would the Chancellor accept that having achieved this very welcome safety net for sterling it would be ludicrous for the Government to fall into the trap of attracting vast sums from overseas which we would be forced to repay in the event of a downturn in the economy? Is it not correct that we should pursue a policy to prevent that occurrence, which is the whole reason for the safety net precautions?

§ Mr. Healey
With respect, my hon. Friend is mixing the two things. The purpose of the safety net is to protect sterling against the possibility of a further run-down of official balances—a run-down which we want to encourage, and to which foreign currency bonds will contribute. On the question of the increase in private sterling balances, it is not possible at this moment to identify the proportion of sterling coming in recently which belongs to British residents and that which belongs to foreigners. But if it is necessary to take further action to discourage these inflows we shall take it. We have made clear that we have no intention of using such inflows as a means of financing our current account deficit. The best evidence of that is the impressive loan which I announced on Monday.

§ Mr. Hordern
But surely the Chancellor must know that present sterling balances held by private holders have very little to do with leads and lags, and a great deal to do with foreign buying of gilt-edged securities. This is because of the interest level which the Government are allowing. What is Government policy towards private holders of sterling balances? Is it to encourage or discourage them? Is it Government policy to allow interest rates to be as high as they are—that is, far higher than those of other countries? It just does not make sense.

§ Mr. Healey
The hon. Member thinks that he knows more about the composition of the recent inflows than does the Bank of England. Of course he may well be right, but his record gives little ground for confidence. On the question of interest rates, I was told by Conservatives many times in the recent past that there was no 1677 possibility wheatsoever of the rates coming down within a time-scale that would ensure that the increase in October did not have a damaging effect on private industry in Britain. We all know that since October the short-term interest rates have already come down by 1¾ per cent., and no doubt the hon. Member has read newspaper accounts of what may happen later this week.

§ Sir G. Howe
I forbear from comment on the Chancellor's record, but I want to know a little more about interest rates. Can the Chancellor assure us that he is still fully aware of the necessity of getting public borrowing down in order to reduce interest rates and of the dangers of maintaining a competitively high interest rate with the damage that that could do to investment in this country? The Chancellor has said before that he would be anxious to discourage any excessive inflow of private capital. Will he bear in mind our anxiety that the worst thing for this country would be a barrier of exchange controls against incoming money alongside a barrier of exchange controls to stop money going out? Is he aware that we should welcome any movement towards the liberalisation of exchange control?

§ Mr. Healey
The right hon. and learned Gentleman has mixed up five or six different matters there, but I shall try to disentangle them. We have already taken steps to reduce the amount of money the Government require to borrow, and the extent of the reduction has been welcomed by foreign markets. The recent strengthening of sterling, the inflow of money into this country, and the reduction of interest rates all reflect the success of measures I announced last December, measures which were denigrated at the time by the Opposition Front Bench.
On the exchange control point, I note what the right hon. and learned Gentleman said, but he must make up his mind whether he wants to keep money supply under control, as the Government have done, or whether he wants things to happen as they happened when he was last in office and let the money supply go hang. I hope, however, that at least we shall have congratulations from him on that, contrary to the expectation of many of his hon. and right hon. Friends, there is now no doubt that we shall 1678 achieve the domestic credit expansion and money supply targets to which we committed ourselves for the current year.