HC Deb 23 November 1978 vol 958 cc1458-60
5. Mr. Clemitson

asked the Chancellor of the Exchequer if he will make a statement on the effect of the recently announced increase in minimum lending rate.

Mr. Healey

The increase in MLR had its intended effect of stabilising market interest rates. The new level of short-term interest rates is ½ per cent. to 1 per cent. higher than the level ruling immediately before the change. The increase in long term rates was much less, on average about one-quarter. These changes reestablished conditions in the gilts market in which it was possible to resume funding the PSBR on a significant scale.

The clearing banks have since raised their base rates by 1 per cent. The Building Societies Association announced an increase in the recommended mortgage rate by 2 per cent., although most of that increase was in response to the increase in market rates which preceded the increase in MLR, as the association stated very fairly in announcing its decision.

The possibility of a reduction—[HON. MEMBERS: "Too long."] With respect, I was asked to make a statement on the effect of the recently announced increase and I think that I owe it to my hon. Friend to do so, however inconvenient it is to hon. Members opposite to hear it.

The possibility of a reduction in interest rates depends largely on the prospect for inflation, and therefore critically on moderation in pay settlements in the coming months.

Mr. Clemitson

I am grateful to my right hon. Friend for that answer. Is it not true that the policy was intended to be anti-inflationary? Do not such supposedly anti-inflationary policies as raising the minimum lending rate have in the end the reverse effect? Do not they result in cutting living standards by, for example, the raising of the mortgage rate? Is not this an incitement to people to claim higher wages rather than an encouragement to them to moderate their claims?

Mr. Healey

It is the case that the increase in mortgage rates will add somewhat to the retail price index—something under half of 1 per cent. in the coming months. But I believe that if the Government had not shown their determination to control the monetary aggregates the increase in inflation would have been much higher and much more damaging to the prospects of the pay policy. But I strongly agree with my hon. Friend that low rates of inflation should encourage moderation in pay settlements, and I hope and know that he will support the Government in seeking a response from the trade unions to the fact that the rate of inflation has been cut by half in the past 12 months and living standards have risen by 7 per cent.

Mr. Lawson

When will the Inland Revenue be recoding home buyers to enable them to get the tax relief due to them as a result of the sharp increase in interest rates? Can the right hon. Gentleman confirm the alarming reports that this is to be delayed for several months, probably until August? If so, why?

Mr. Healey

The hon. Gentleman would contribute to the ease with which the House gets through its business if he read the Order Paper occasionally. He would then discover that the next Question is devoted entirely to that matter.

Several Hon. Members

rose

Mr. Speaker

Order. We are running very much behind time.