HC Deb 26 February 1987 vol 111 cc406-8
7. Mr. Alan Howarth

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

13. Mr. Sedgemore

asked the Chancellor of the Exchequer what representations he has had recently on the level of United Kingdom interest rates.

The Chancellor of the Exchequer (Mr. Nigel Lawson)

Bank base rates are currently 11 per cent.

Mr. Howarth

My right hon. Friend will be aware that the very favourable configuration of public finances, upon which he is to be congratulated, is giving rise to much optimism about the future course of our interest rates. Does he agree that we now have an important opportunity to lower the Government's prospective borrowing requirement and that a prudent course of that sort, in contrast with the degrees of extravagance proposed by the various Opposition parties, would give the best prospect of fulfilling those hopes for lower interest rates in the long term?

Mr. Lawson

I am grateful to my hon. Friend for his remarks about the state of the economy, which is indeed in a particularly sound condition, as is widely recognised by everybody, even including now—for the first time that I can recall—the National Institute of Economic and Social Research. As to the question of the public sector borrowing requirement, as my hon. Friend knows, it is an integral part of the medium-term financial strategy that the public sector borrowing requirement should be reduced—as it has been. That has clearly brought great benefits in its wake, just as there would be great disasters were the public sector borrowing requirement to be inflated in the way that all the Opposition parties wish it to be.

Mr. Roy Jenkins

Will the Chancellor tell us the comparable rates of interest at present in Germany and in France, the two major countries which are fully within the European monetary system?

Mr. Lawson

I am not at all clear that the difference between interest rates in this country and those in France and Germany is attributable to the fact that those two countries are in the exchange rate mechanism of the EMS and we are not. It is perfectly true that interest rates are higher in this country. That is well known. That is necessary at present in order to secure a steady downward pressure on inflation. Interest rates will be lowered only as and when it is safe to do so.

Mr. Beaumont-Dark

Does my right hon. Friend agree that one of the most important factors for manufacturing industry is not so much a reduction in tax as a reduction in interest rates? Does he also agree that one of the most helpful things that could happen would be to reduce Government borrowing so that 2 per cent. could come off interest rates rather than 2p off income tax?

Mr. Lawson

I note my hon. Friend's suggestion that there should be a further reduction in Government borrowing. It is difficult, however, to draw the precise connection between a particular reduction in Government borrowing and a particular effect on the interest rate. It is far more complex than that. The level of public sector borrowing is one factor that determines the level of interest rates, but there are many others as well, as I have pointed out on a large number of occasions. As for British industry, I am sure that my hon. Friend will welcome the fact that British industry is exceedingly healthy. That is one of the reasons for the strong improvement in the Government's tax revenues, which are coming from increased profitability and increased corporation tax.

Mr. Robert Sheldon

If the Chancellor believes in the success of the Plaza II agreement, does he not also accept the consequences of that for lower interest rates in this country?

Mr. Lawson

I share the right hon. Gentleman's hope that the Plaza II agreement, in which I participated, will be successful. I think that it will be helpful in a number of ways. So far the signs are that it is succeeding, but I think that it is premature to reach a final judgment on that.

Mr. Andrew MacKay

At this time, when the country is greatly anticipating a cut in interest rates due to the Government's prudent economic policy, would my right hon. Friend care to speculate on how much interest rates would be likely to increase if the full public expenditure committed by the Opposition were implemented through an increase in borrowing?

Mr. Lawson

Of course, there would have to be a massive increase in interest rates if there were to be the misfortune of a Labour Government, which, of course, there will not be, not merely, although partly, because of a massive increase in public expenditure and public borrowing, to which they are committed, but because their policies would completely forfeit the confidence of the world financial community. There would be a major exchange rate crisis, which would force up interest rates still higher. It is fortunate, indeed, that that nightmare will never become reality.

Mr. Skinner

The Chancellor referred to the many factors involved in interest rates going up or coming down. Is it fair to say that the Government may follow the pattern of what happened before the 1983 general election, when they timed a cut in interest rates to precede the election but having managed to return safely to office they then carefully and dutifully put them up again?

Does the right hon. Gentleman agree that another factor is that Brazil has suspended payments on the $108 billion debt and that, coupled with all the other Latin American debt, could have a serious effect on interest rates? What discussions did he have at the recent conference on that matter?

Mr. Lawson

On the first part of the hon. Gentleman's question, I am, of course, grateful to him, as ever, for the helpful hints that he has given me. On the second part, we did have a discussion about the Brazilian debt problem in Paris last weekend, and I shall be seeing the Brazilian Finance Minister, Mr. Funaro, on Monday.

Sir Michael Shaw

Does my right hon. Friend realise that among all the difficulties that face small farmers in my constituency, nothing would do more good and help to relieve the position in which they find themselves than the lowering of interest rates?

Mr. Lawson

I entirely take the point that my hon. Friend has put, and I am confident that, over time, the success of the Government's economic policies will lead to interest rates coming down, but, as I have said on a number of occasions, they will come down only when it is prudent for them to do so.

Dr. McDonald

Why are United Kingdom real interest rates so high?

Mr. Lawson

That is a rich one coming from the Opposition Benches, because it was the Opposition who got real interest rates so low that they were negative, and they did that by getting inflation going through the roof, and we are not going to go that way.