Interest Rates (Hansard, 29 January 1987)

§ 7. Mr. Sedgemore
asked the Chancellor of the Exchequer to what factors he attributes the current real level of United Kingdom interest rates in relation to those prevailing in the other six main Organisation for Economic Co-operation and Development countries.

§ Mr. MacGregor
One factor is the need to keep interest rates at levels which maintain downward pressure on inflation.

§ Mr. Sedgemore
Bearing in mind that the goods in the monetarist pantheon were ritually slaughtered in the autumn statement, and the Chancellor was found cowering in the crypt with the blood of an impending election on his hands, is it not time that the idolatry stopped and we started reducing interest rates for industry, borrowers and home owners as part of a wider plan to get Britain working again?

§ Mr. MacGregor
The first part of the hon. Gentleman's question is untrue. As the public sector borrowing requirement is being fulfilled for this year, and will be for next. my right hon. Friend the Chancellor has not done what the hon. Gentleman suggests.
As to the level of interest rates, I have made it clear that bringing down inflation is a crucial factor. There is nothing more important to most people, and to industry, than keeping inflation at the level that we have at the moment, or preferably lower.
Investment is at record levels, the profitability of industry is back to the levels of many years ago, and liquidity is high. The plain fact is that investment is going ahead strongly.

§ Mr. John Browne
Does my right hon. Friend accept that the dismantling, and even the smallest possibility of a resurgence, of Socialism has an upward push on the real level of interest rates?

§ Mr. MacGregor
My hon. Friend is entirely right. The policies that the Opposition intend to pursue, particularly their spending policies—they have admitted this—with a big increase in the public sector borrowing requirement, would indoubtedly push up interest rates and drive us back to the negative rural interest rates of the previous Labour Government, and that in itself can be very damaging to the confidence of investors. They achieved a high level of inflation then and will achieve the same again if those policies are pursued.

§ Mr. Roy Jenkins
Will M0 follow M1 and M3 in being discarded, and, if so, what will be the point of discipline to which interest rate policy will be related? Will it be an exchange rate target, and, if so, what is the point of pursuing that outside the exchange rate mechanism of the EMS?

§ Mr. MacGregor
My right hon. Friend the Chancellor of the Exchequer has said on many occasions that he looks at a number of factors and guidelines when determining monetary policy. He has spelt that out clearly in many speeches; so much so that one noted City economic commentator on monetary matters says that no Chancellor has ever done so much to explain publicly his monetary policy.

§ Mr. Maples
Is not one of the reasons why real interest rates are so much higher here than in other countries the fact that our bank lending is growing so fast, and thus interest rates have to rise to attract the deposits to fund that increased lending?

§ Mr. MacGregor
One of the factors has been the heavy corporate demand for investment finance in recent years. The freeing of the financial system from various inefficient and unfair controls has been another factor. However, it is worth stressing again that the current level of interest rates is not inhibiting a high level of investment in Britain.

§ Mr. Gould
The Chancellor does a lot of explaining because he has a lot to explain. Is it not perfectly obvious that if the Chief Secretary was brave enough to be honest with us he would admit that the only reason why we have real interest rates twice as high as Germany is that that is now the Chancellor's only means of warding off a sterling crisis? Is that not further evidence of the fragility of our economic situation and the dangerous high wire that the Chancellor has to tread?

§ Mr. MacGregor
That is certainly not the case, as is borne out by many economic factors at the present time. It is quite difficult to establish the precise parallels in international real interest rates, as I think the hon. Gentleman would agree. Taking the consumer price index as well, to suggest that our real interest rates are twice the level of West Germany is wrong. It is rich of the hon. Gentleman to suggest that interest rates are too high, when his own PSBR policies would undoubtedly increase our interest rates even more.