HC Deb 26 June 1980 vol 987 cc727-8
8. Mr. Latham

asked the Chancellor of the Exchequer what are the factors currently preventing him from reducing interest rates; and whether he will make a statement.

Sir Geoffrey Howe

As I have made clear on many previous occasions, our policies are intended to create the conditions in which it will be possible for interest rates to fall in due course.

Mr. Latham

Does my right hon. and learned Friend accept that the present rates of interest conflict with the Government's other essential strategy of encouraging small businesses and helping them to expand? When does he intend to resolve that conflict?

Sir G. Howe

Clearly, for that, and a number of other reasons, it is desirable that interest rates should come down as soon as it is possible for them to do so, consistent with proper management of the money supply.

Mr. Robert Sheldon

Is the right hon. and learned Gentleman aware that the high level of interest rates, together with the high level of the pound, is causing acute problems for many of our most successful companies, the latest of which is Rolls-Royce Motors? Will he bear in mind that it is not enough to adopt a simple solution of putting inflation as one's first priority if the result is the industrial dereliction which will be typified by a number of these excellent companies finding themselves in great difficulties?

Sir G. Howe

I make no comment on the particular case raised by the right hon. Gentleman. However, it must be understood—this was the experience of the Government of which he was a member—that the process of controlling the money supply at a time of high inflation necessarily involves, for a period, high rates of interest. In addition, the exchange rate is outside the control of the Government. It is, therefore, important for those concerned with the management of industry or pay bargaining on both sides to recognise the extent to which they are themselves capable of changing conditions in order to avoid the worst consequences.

Mr. Eggar

When my right hon. and learned Friend decides to make decisions based on his evaluation of the state of the money supply, can he give some indication of what relative weight he gives to the figures for DCE, banking and £M3?

Sir G. Howe

They are all among the factors which must be taken into account.

Mr. Denzil Davies

Does not the right hon. and learned Gentleman agree that if he reduces interest rates significantly it will only mean an increase in bank lending? Presumably an increase in bank lending will increase the money supply, which will then put up the rate of inflation. Therefore, what is the point of reducing interest rates?

Sir G. Howe

The right hon. Gentleman seems to have a remarkable capacity for standing on his head, because only a moment ago his right hon. Friend urged the merits of reducing interest rates. The right hon. Gentleman will know that interest rates tend to be a leading indicator as inflation comes down. When that time comes—I cannot make any comment as to when it will be—it will not have the adverse effect which he suggests.

Mr. Richard Wainwright

Can the Chancellor now explain how he reconciles the prospects of reduced rates of inflation, which he held out yesterday at the Carlton Club, with the relatively rapid acceleration of domestic credit expansion in the banking month of May?

Sir G. Howe

I would not attempt to take only one month's figures. If the hon. Gentleman chooses to do that in relation to one indicator, he is likely to mislead himself in many directions.