HC Deb 26 June 1980 vol 987 cc725-7
7. Mr Peter Bottomley

asked the Chancellor of the Exchequer what is his estimate of the effects of the levels of interest rates upon inflation.

Mr. Lawson

If a rise in the general level of interest rates raises mortgage interest rates, there will be a short-run increase in the RPI as a result of higher housing costs. However, in the long run, the rate of inflation is determined by the rate of money supply growth. As higher interest rates help to reduce money supply growth, they will in the longer run help to bring down the rate of inflation.

Mr. Bottomley

I am naturally most grateful for that answer. With regard to reductions in the rate of interest, does my hon. Friend recall the controlled experiment, when an answer by the Prime Minister to a question of mine knocked four cents off the value of the pound? Can I take it that the impact of reducing interest rates and the consequences for the value of the pound will lead to more industrial activity at some cost to the rate of rising prices?

Mr. Lawson

It is certainly no part of our policy to maintain high interest rates for their own sake. As soon as interest rates can be reduced, consistent with maintaining the monetary targets, they will be reduced.

Mr. Healey

Is not the hon. Gentleman aware that interest rates increase inflation because they increase the cost to industry, both of investment and of holding stocks, and that industry at present is groaning under the impact of these excessively high interest rates, which are far higher than is needed to control the money supply? Does not the hon. Gentleman agree that the attempt to re- duce private bank borrowing by excessively high interest rates has been proved a total failure?

Mr. Lawson

As usual, the right hon. Gentleman is wrong, and he knows that he is wrong, because he increased interest rates during his tenure as Chancellor of the Exchequer as a means of assisting in the battle against inflation. He also knows that countries throughout the world have increased interest rates over the past year, again as part of the necessary battle against inflation.

Mr. Healey

Is the hon. Gentleman aware that when I increased MLR to 15 per cent., it started falling immediately and reached 5 per cent. within 12 months? He has maintained a 17 per cent. MLR for eight months already, and, apart from occasional murmurs from the Chancellor, which have been proved wrong within days of their being made, there is no prospect of a substantial fall in interest rates before the autumn, at least.

Mr. Lawson

By allowing interest rates to come down too far, too fast, the right hon. Gentleman laid the groundwork for the rapid increase in monetary growth during the 18 months before the 1979 general election, which as my right hon. and learned Friend has pointed out, is the cause of the inflation from which we are now suffering.

Mr. Dykes

Can my hon. Friend say whether there is now growing evidence that companies are finding it increasingly difficult to repay some of the interest charges, and that they are being added to the net value of outstanding loans, thereby increasing the total amount of loans outstanding in the company sector?

Mr. Lawson

I have no doubt that in individual cases that may be so, but as a whole, the high level of interest rates is contributing to the lowering of inflation, not merely through bank lending but through the necessity of funding the very high Government borrowing requirement, which we have reduced from the abysmal inheritance that we received from the previous Administration.

Mr. Campbell-Savours

Has the hon. Gentleman read the speech of his right hon. and learned Friend the Member for Hexham (Mr. Rippon) in the employment debate yesterday? What does he think of the right hon. and learned Gentleman's comments on this subject, and those of his right hon. Friends who sit on the Government Front Bench?

Mr. Lawson

I regret that I have not yet had the opportunity of reading the comments of my right hon. and learned Friend the Member for Hexham (Mr. Rippon). Therefore, I cannot comment on them.