HC Deb 10 March 1981 vol 1000 cc765-6

These initiatives will be accompanied by other improvements in monetary control. Following extensive consultations based on last year's Green Paper, I outlined last November some changes that were desirable in their own right and would be consistent with a gradual evolution to monetary base control. These will come into effect during the coming financial year.

The reserve asset ratio has complicated monetary control. The first step in phasing it out was made in January. In the next month or two, at the conclusion of talks now to be undertaken with the banks, the ratio will cease to be a minimum requirement. Thereafter it will be adapted to have a transitional role as a prudential norm round which there will be variation, until the detail of the new arrangements has been settled.

The Bank of England has already made some useful changes in its money market operations. In its dealings with the discount houses it now relies mainly on buying and selling bills. Direct lending to the market has been greatly reduced. The interest rate on this lending is also now generally somewhat above comparable market rates, while the rates at which the Bank conducts its open market operations have become more flexible. In conducting its operations in bills the Bank no longer quotes rates for more than one month ahead. Instead, it responds to bids and offers. This has the great advantage of allowing the market a greater role in determining the structure of short-term interest rates.

Discussions are now to take place with the financial institutions about these and other changes, including the future of the cash ratio. When they are complete, the Bank will aim to keep very short-term interest rates within an unpublished band, and in due course suspend altogether the practice of having an announced MLR, which would by then have lost its operational significance.

Decisions about short-term interests rates will continue to take account of the whole range of monetary indicators referred to earlier and other factors that affect the significance of the numbers, especially the progress of inflation. Modest reductions in interest rates were made in the second half of last year. Progress in reducing inflation, strongly positive real interest rates, a noticeable slackening in the growth of sterling M3 in recent months, and a marked fall-off in bank lending point towards a further reduction in rates. The increases in taxation that I am proposing in the Budget will make it possible to have an immediate reduction. Accordingly, the Bank of England is today, with my approval, reducing its minimum lending rate by two percentage points.