Interest Rates (Hansard, 26 March 1981)

§ 11. Mr. Newens
asked the Chancellor of the Exchequer if he will make a statement on the present level of interest rates.

§ Sir Geoffrey Howe
MLR has been reduced by 5 per cent. since last summer. I have nothing further to add to my Budget Statement.

§ Mr. Newens
Does the Chancellor of the Exchequer realise that, despite those reductions, the present levels of interest rates still constitute a major deterrent to investment and one of the causes of overvaluation of sterling, which is a serious, formidable obstacle to all exporters? Does he not realise that many experts consider that interest rates could have come down by another 2 per cent., and that until steps are taken to bring that about no recovery will be possible? When will he take action?

§ Sir Geoffrey Howe
The hon. Member should acknowledge the significance of the substantial reduction that has already been achieved. He should beware of believing that there is a reliable and certain relationship between interest and exchange rates. Interest rates in this country have come down by five points in the last nine months. They are now below the average for the OECD, and below the figures for the United States and Germany.

§ Mr. Latham
The 2 per cent. reduction in the Budget was welcome, but will my right hon. and learned Friend confirm that he now links minimum lending rate with all prevailing economic factors, and not solely with the money supply? If that is so, further reductions should follow the deflationary Budget.

§ Sir Geoffrey Howe
In my Budget speech I described at length the factors that should be taken into account in relation to interest rates. The Budget was designed to create a setting in which the interest rate reduction announced on that date could take place. I hope that all 1069 hon. Members will support the policy of ensuring that borrowing is kept to a reasonable size to ensure that further progress is made in that direction.

§ Mr. Woolmer
Despite the reduction in interest rates, is it not true that investment in manufacturing industry fell by 5 per cent. last year and that the latest forecasts are that it will fall by up to a further 15 per cent. this year? As unemployment has risen by 1 million in 12 months, and as manufacturing production has fallen by 15 per cent., is it not time that, instead of claiming credit for bringing prices down, the right hon. and learned Gentleman accepted the blame for the disastrous effect on industry of his policies?

§ Sir Geoffrey Howe
I shall do no such thing. The hon. Gentleman knows that unless we achieve and sustain progress against inflation there will be no chance of achieving progress against unemployment. That was the clear lesson from the period of office of the Labour Government. The Budget is designed to sustain progress in that direction and to create the conditions in which investment and employment begin to grow.

§ Mr.Cormack
Why has my right hon. and learned Friend missed the significance of the question asked by the hon. Member for Harlow (Mr. Newens)? Why does he not congratulate him on his conversion to capitalism?

§ Mr. Shore
The right hon. and learned Gentleman will have seen the latest company reports from Lucas, showing that it has lost about £23 million in the second half of this year. That follows a long tale of collapse, or near collapse, of many of the great British exporting firms. Does he agree that interest rates, and particularly the relationship between interest rates and the exchange rate, are crucial, as my hon. Friend the Member for Harlow (Mr. Newens) asserted? When will he take action to bring down the appallingly over-high exchange rate of the pound?

§ Sir Geoffrey Howe
The experience of successive Governments is that it is unwise to conclude that there is any direct or simple link between interest and exchange rates. The important thing is that there is a good case, in its own right, for securing reductions in interest rates that are compatible with responsible monetary policies. The right hon. Gentleman should not fall into the common habit of assuming that all the difficulties facing companies are unique to this country or are consequences of the Government's policy. The right hon. Gentleman knows that companies in the motor industry throughout the world are making substantial losses because of what is happening to that industry throughout the world.