HC Deb 20 March 1980 vol 981 cc624-6
7. Mr. Dykes

asked the Chancellor of the Exchequer if he is satisfied with the current levels of interest rates.

Mr. Lawson

My hon. Friend has already asked this question once this afternoon. Once again, the answer is no; but until we have succeeded in bringing public spending and borrowing under control, interest rates at their present level are necessary to maintain firm control over monetary growth. Interest rates will come down as our policies reduce the rate of inflation.

Mr. Dykes

While my hon. Friend often refers to United States interest rates, will he not reflect that, if we had a closer economic relationship with other European countries, where interest rates are much lower, we could emulate their example by reducing the value of the pound, dropping minimum lending rate as soon as possible by at least one point, and joining the European monetary system?

Mr. Lawson

My hon. Friend should be aware that interest rates in Europe have risen by about the same amount—five to six points— since May, as they have risen in this country. The reason why interest rates vary from country to country is that inflation differs from country to country. There is no way in which, simply by joining more closely with other European countries, we could change that discrepancy overnight.

Mr. Healey

Does not the Financial Secretary agree that if he had not broken all his monetary rules and lent £1,500 million to the clearing banks over the past few months, interest rates now would be over 20 per cent., in line with the rate of inflation?

Will he assure the House that he will not follow the German example and raise interest rates further in order to protect the exchange rate? Is he aware that, contrary to what he has told the House, Mr. Poehl, the chairman of the Bundesbank, admitted publicly that the only reason why the Germans recently raised interest rates was to increase the value of the deutschemark when the dollar was strengthening?

Mr. Lawson

On the last part of the right hon. Gentleman's question, that is not our policy, nor do we need to do that. Sterling is strong because of confidence in the Government's economic policies.

As for the right hon. Gentleman's extraordinary comments on the sale and repurchase operations, he should be well aware that it was a technical operation dictated by a temporary shortage in the money markets, which was due partly to the great success in funding and partly because the public sector borrowing requirement had gone into surplus as a result of the tax gathering season. That reflects no change in the monetary policy of the Government.

Mr. Eggar

Does my hon. Friend believe that interest rates are influenced most by the rate of inflation or by the level of the public sector borrowing requirement? Does he believe that it is possible to reduce interest rates without reducing the level of the public sector borrowing requirement?

Mr. Lawson

My hon. Friend is absolutely right. Interest rates are affected both by the level of the PSBR and by the level of inflation. That is one of the reasons why we are determined to reduce the level of the PSBR.

Mr. John Evans

Will the Minister explain how the current level of interest rates, which appears to be so helpful to the banks, does not appear to be so helpful to small businesses?

Mr. Lawson

The higher inflation rate which would result if there were not a firm monetary policy, which regrettably involves high interest rates for the time being, would be far worse for small business-men than the present level of interest rates.