HC Deb 25 July 1985 vol 83 cc1299-300
13. Mr. Hayes

asked the Chancellor of the Exchequer when he will next be having discussions with the Governor of the Bank of England about interest rates; and if he will make a statement.

15. Mr. Hirst

asked the Chancellor of the Exchequer if he will make a statement on the current level of interest rates.

Mr. Lawson

The Governor and I regularly discuss interest rates in the context of the monetary policy and conditions. Short-term interest rates have fallen by around 2 per cent. since January. Rates will continue to be held at whatever level is needed to maintain monetary conditions that will keep steady downward pressure on inflation, but no higher than that.

Mr. Hayes

Does my right hon. Friend agree that an attitude of excessive caution towards interest rates can only damage prospects for employment and economic recovery? Does he further agree that a 2 per cent. cut in mortgage rates would cut inflation by 0.6 per cent. and help industry to contain its costs?

Mr. Lawson

It is the responsibility of industry to contain its own costs. It must accept that responsibility, and it cannot look to advantageous reductions in mortgage rates—much as we would wish to see those—to do the job for it.

Mr. Hirst

While I welcome the recent reduction in interest rates, may I ask my right hon. Friend whether he agrees that real interest rates are still too high and constitute a severe disincentive to businesses and home buyers? In view of the more encouraging predictions about inflation and the recovery of sterling, what hope does he hold out for a reduction in interest rates later this year?

Mr. Lawson

I hold out hope that there will be a reduction in interest rates at the appropriate time. However, if there is one thing substantially worse than the present, relatively high real rates of interest—although they are not so very much higher than in other countries —it is the negative real rates of interest that obtained during the inflationary 1970s. No capitalist society or economy can survive with rates such as those.

Mr. Austin Mitchell

Will the Chancellor explain why our interest rates are not only at record real levels but are one third higher than those in the EEC and double those in Japan? Will he further explain why every mortgage, hire purchase contract, overdraft and unit of local government is being crippled by high interest rates just to keep the pound at an overvalued level?

Mr. Lawson

There is no way of controlling monetary policy without holding interest rates at a level high enough to keep that control; and there is no way of controlling inflation without having proper control of monetary conditions.

Sir William Clark

Does my right hon. Friend agree that a 1 per cent. cut in interest rates would improve the competitiveness of British industry to the extent of £250 million in a year? Does he further agree that if we could achieve a 1 per cent. cut in labour costs the benefits to British industry would exceed £1,000 million a year?

Mr. Lawson

I agree with my hon. Friend's comparison. Indeed, I recall drawing that comparison myself on an earlier occasion, but it certainly bears repetition. His remarks point to an important problem in our economy— the high rate of growth in labour costs per unit of output in this country compared with that of our main competitors overseas.