HC Deb 13 February 1986 vol 91 cc1084-5
6. Mr. Forman

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

Mr. Lawson

Short-term interest rates are held at whatever level is necessary to maintain sound financial conditions, but no higher.

Mr. Forman

Does my right hon. Friend agree that it is vital to the future of the economy to achieve lower and more stable interest rates? Towards that objective, at a time when the oil crisis is considerably less and the pound is competitive with the deutschmark, would it not be helpful to consider urgently the possibility of joining the exchange rate mechanism of the European monetary system?

Mr. Lawson

That is a matter that we keep regularly under review. The factors to which my hon. Friend has referred obviously must be taken into account.

Mr. Wrigglesworth

If the Chancellor will not give an assurance on that, will he give an assurance that he will respond positively to the initiative taken by President Reagan in calling for internatinal monetary reform? Will he respond to the appeal for a conference? Will he cooperate with the American Administration in seeking to reduce interest rates to achieve more stable exchange rates?

Mr. Lawson

I noted the passage in President Reagan's "State of the Union" address in which he asked the American Treasury Secretary to examine whether it would be a good idea to hold an international monetary conference. I believe that there are great dangers 3n holding an international monetary conference when we Oo not know what proposals to put to the conference. However, if there is a way to build on the Plaza agreement and inject some stability into the foreign exchange market, I would welcome it.

Mr. Sackville

Is my right hon. Friend aware of the country's widespread desire for lower interest rates? Is he aware of the complete lack of public understanding about why interest rates must remain so high?

Mr. Lawson

Everyone would like lower interest rates, except perhaps those who are savers and depositors in building societies and banks. No doubt they are content with their return. It is much better to get the return that those people receive today than to be cheated of their savings as they were under the Labour Government, when there was a negative real rate of return.

Mr. James Lamond

Are there any lines of communication between the ivory towers of the Treasury and the embattled Departments of Employment and of Trade and Industry, which are faced with increasing unemployment, including a large increase last month that especially affects the north-west, which is dependent on manufacturing industry? Does the Chancellor of the Exchequer realise that in the complacent world in which he lives, people are unemployed because of the Treasury's policies?

Mr. Lawson

To answer the first part of the hon. Gentleman's question, the Government are one harmonious whole—

Mr. Canavan

They have fallen into a hole.

Mr. Speaker


Mr. Lawson

Unemployment is a matter not for complacency but for concern, and that is why the Government have taken many measures to address the problem directly. The hon. Gentleman will recall that in my Budget last year I restructured national insurance contributions for employers and the lowest-paid employees, which came into force only four months ago. Therefore, we have not seen its full effect. I also announced the two-year youth training scheme, which will not come into force until April this year, but which I believe will have a beneficial impact.

Mr. Yeo

Does my right hon. Friend agree that an absolute condition for lower interest rates is a low and sustained low rate of inflation, and that if inflation falls to 3 per cent. this year there will be a good prospect of reducing interest rates? Does that not contrast badly with the prospect if the policies espoused by the Labour party and the alliance were followed?

Mr. Lawson

My hon. Friend is right. The policies of the Opposition, who propose an extra £24 billion of public expenditure, would not merely cause a substantial increase in taxation and a VAT rate of 41 per cent., as my right hon. Friend the Chief Secretary said yesterday, but would be highly inflationary, which would certainly mean higher interest rates.

There is another factor. The markets are worried that our unit labour costs are increasing faster than those of other countries and that, therefore, we may be becoming less competitive. That tends to put pressure on the pound from time to time and requires interest rates to be higher than they would otherwise be. Therefore, if wage increases were lower, there would be less pressure for interest rates to remain high.

Mr. Hattersley

Why are British interest rates so much higher than those of our OECD competitors?

Mr. Lawson

I gave the answer to that a moment ago.