Money Supply (Hansard, 25 May 1978)

§ 7. Mr. Wyn Roberts
asked the Chancellor of the Exchequer if he is satisfied with the rate of growth of the money supply to date in the current year.

§ Mr. Healey
In the 12 months to mid-April 1978, sterling M3 grew by 16¼ per cent., which was above the upper end of my preferred range. However, in the last two months there have been rises in interest rates, particularly short-term rates, which will not yet have influenced the published figures but which reflect the Government's determination to keep sterling M3 growth in the year to mid-April 1979 within the 8–12 per cent. target range which I announced in my Budget Statement.

§ Mr. Roberts
Does the right hon. Gentleman agree that this anticipated increase in money supply is bound to lead to an increase in inflation of the order of 11.2 per cent. annual rate that we have experienced in the last three months?

§ Mr. Healey
No, Sir. I cannot agree with the hon. Gentleman, because Western Germany, for example, has an inflation rate of 2.9 per cent., although it reached its money supply target last year. The central question is whether we bring money supply back into the target range in time.
I must tell the hon. Gentleman, because I know that he takes these matters 1732 seriously, that special factors influenced the increase last year. First, there were excessive inflows of external currency, which have been reversed in recent months.
In the second place, the bringing forward of public spending by authorities that sought to take advantage of shortfalls in the last fiscal year is likely to lead to smaller increases in public spending in the coming months than would otherwise have taken place.
Thirdly, there was the higher-than-expected liquidity of institutions, to which the Financial Times referred. Institutions which were staying out of the market for the time being cannot complain about an increase in the money supply, which reflects a deferral of decisions which they are to take.
Fourthly, the Government have already allowed substantial increases in interest rates since this overshoot in money supply took place. The effect of these decisions has yet to be felt.
Fifthly, there may have been some window dressing by clearing banks which feared the introduction of the corset, but the Government have already made clear that if the corset is introduced it will have a retrospective effect, so that banks which have taken this course will derive no benefit from it whatever.

§ Mr. Hardy
Will my right hon. Friend remind the House that in the latter half of 1973 money supply was growing at a rate of about 28 per cent., with scarcely any comment from the Conservative Party? Does he agree that that marked and adverse rate had a serious effect on the rate of inflation during the early years of this Government's life?

§ Mr. Healey
It is indeed the case that in the last two years of the Conservative Administration money supply was about twice the rate of money GDP. In the four years of the present Administration, it has grown at about half the rate of money GDP.

§ Mr. Fletcher-Cooke
Is the right hon. Gentleman aware that all the authorities, including the Treasury and the Bank of England, were caught on the hop and were much surprised by this sudden spurt? Is he satisfied that the monitoring mechanisms at his disposal will ensure that he is not caught by surprise again?

§ Mr. Healey
It is indeed the case that at least two of the factors to which I have referred were not foreseen, and I am considering ways in which the Bank of England should exercise surveillance of contributions to the increase in money supply to see that we are not caught on the hop, as the hon. and learned Gentleman said. If he looks round the world, he will find other Governments who are also finding it extremely difficult to judge movements of money supply in advance over a short period. This is true particularly of the United States of America and Germany.

§ Mr. Stoddart
Is it not mealy-mouthed hypocrisy for the Opposition to attack these money supply figures, not only because of the 28 per cent. annual growth under their Government but because of their recent action in increasing the PSBR by over £500 million, which can only have added to my right hon. Friend's difficulties in this regard?

§ Mr. Healey
There is a great deal in what my hon. Friend says. I have already characterised the Opposition Front Bench, in making these criticisms of the present Government, as Satan rebuking virtue. If I were a physician seeking to deal with a serious disease, I should not go first for advice to the bacteria which caused it.

§ Sir G. Howe
Will the Chancellor look again at what he has been saying about the German parallel, from which he draws comfort? Is it not a fact that Germany has overshot its single target figure of 8 per cent. by 1 per cent., a margin of error of 12½ per cent., and does not that compare favourably with the Chancellor's quite different performance? His central target figure for the year just ended was 11 per cent., and he succeeded in achieving a figure of 16¼ per cent., which means that he missed his target by 50 per cent.
In the past six months, has not the Chancellor achieved a growth rate of 21 per cent. in sterling M3, exactly twice as fast as he intended? If the inflow of funds to which the right hon. Gentleman referred is meant to put the matter right, why is the explosion in money supply continuing over the last quarter at a rate of 24 per cent.? Before the Chancellor returns to rebuking us and preaching his sermon, which he has done so often before, if he is in any sense right in 1734 what he says about money policy under the last Conservative Government is he not courting disaster and the certainty of higher inflation by failing to bring money supply under control now?

§ Mr. Healey
The previous Tory Government allowed an increase in money supply for 24 months at a level which the right hon. and learned Gentleman claims has existed under this Government for three months. They held off allowing interest rates to rise over many months, with the result that the situation was beyond repair by the time my predecessor the noble Lord Barber, finally took action in December 1973. This Government have taken action, and I hope that the right hon. and learned Gentleman—perhaps slightly out of the character which he has recently adopted—will recognise the much calmer tone of the gilt markets in recent days.