HC Deb 09 July 1987 vol 119 cc506-8
11. Mr. Macdonald

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

Mr. Lilley

Bank base rates are 9 per cent.

Mr. Macdonald

If the economy is as successful as the Chancellor frequently claims, why do we have one of the highest bank interest rates in the Western world? Does the Minister have any idea of the damage that that is doing to small businesses in my constituency, and when can my constituents expect some relief?

Mr. Lilley

It is not correct to say that British interest rates are the highest. Interest rates are kept at a level sufficient to keep downward pressure on inflation. I wonder whether, during the election campaign, the hon. Gentleman paused to think of the consequence for British interest rates if his party had been elected and had spent an extra £35 billion, largely financed by borrowing?

Mr. Michael Morris

Will my hon. Friend explain exactly what is preventing a reduction in interest rates, given that the economy is doing well, sterling is not under pressure and the credit expansion is being controlled?

Mr. Lilley

As I mentioned, it is our policy to keep interest rates at a level sufficient to keep money GDP on a steady downward path and, therefore, to maintain downward pressure on inflation. We shall continue to do that.

Mr. Campbell-Savours

Why are the interest rates of Belgium, Canada,—[Hon. Members "Reading"]—France, West Germany, Holland, Japan, Sweden, Switzerland and the United States of America all lower than the level of interest rates in this country? [Hon. Members: "Reading".] Why should British business men be penalised when overseas business men are not penalised?

Mr. Lilley

Real interest rates in Britain are about ½ per cent. above the average for other major industrial countries. I have not noticed British industry being penalised, since it is growing faster than industry in any other major Western economy.

Mr. Forth

In adding my best wishes to the others expressed to my hon. Friend about his new position, may I ask him whether he agrees that interest rates cannot be arbitrarily varied on their own as they are necessarily interlinked with and interdependent on the other great factors in any economy, such as inflation and exchange rates? Does he further agree that any responsible Government must bear that in mind when looking at interest rates, which cannot be considerd in isolation?

Mr. Lilley

I thank my hon. Friend for his remarks. He is quite correct. We have to take into account all those factors when determining the level of interest rates, but we give priority to keeping inflation on a downward course.

Mr. Gould

Does the Minister share the Bank of England's continuing concern, indicated again today, about the explosion of credit in the personal sector? Does he agree with his hon. Friend the Member for Lewisham, West (Mr. Maples) that manufacturing industry is now severely constrained by the high interest rates that the personal and property sectors are prepared to pay? Why is it that he and his colleagues are obsessed with public spending, when they should be doing something about this new and damaging version of crowding out?

Mr. Lilley

I am grateful to the hon. Gentleman, who asks almost as many questions as he received votes. Interest rates are not inhibiting output. Output is growing more rapidly and the CBI survey shows that investment intentions are very strong. The hon. Gentleman spoke about the remarks of the Bank of England. They were directed towards the prudential aspects of borrowing. Of course it is correct that financial institutions should look closely at the ability of borrowers to repay their debts and the effect that that has on their balance sheets. We support that.

Mr. Jack

Does my hon. Friend agree that the trend towards lower interest rates has been assisted by the reduction in the public sector borrowing requirement occasioned by the Government's programme of privatisation?

Mr. Lilley

It is certainly true that as my hon. Friend said, if we were to eschew privatisation—even though that programme is primarily carried out for reasons of competition and efficiency—and the revenues that flow from it there would have to be higher borrowing and, therefore, higher interest rates.