Interest Rates (Hansard, 12 November 1992)

§ 13. Mr. Cohen
To ask the Chancellor of the Exchequer what criteria he takes into account in setting the level of interest rates.

§ Mr. Dorrell
The level of interest rates is set so as to meet the Government's objectives for low inflation and sustained economic growth.

§ Mr. Cohen
Although lower interest rates are most welcome, is there not an underlying concern that the main criteria for setting the rate is the Chancellor's whim? Does not experience in the United States show that lower rates will not succeed unless they are matched by sustained investment?

§ Mr. Dorrell
The hon. Gentleman must be one of a relatively small group of people if he believes that there was not a case for reducing interest rates in recent months. We have set the interest rate at the level that we believe holds the balance between our inescapable obligation to hold down the rate of inflation, to safeguard long-term economic prospects, and our desire to create room for growth in the months ahead. Our success in reducing inflation in the past two years has allowed us to plan for growth.

§ Mr. Alexander
Will my hon. Friend remind the House that the inflation rate was 15 per cent. only two years ago? Will he tell the House about the great amount of money that must have gone into the economy as a result of people being able to spend more because they no longer have to pay so much in interest rates? Will he also remind the House, however, that if we reduce interest rates too far, that will work its way through to the value of the pound, the cost of imports and, eventually, the inflation rate and the cost to people of buying things?

§ Mr. Dorrell
My hon. Friend is precisely right to identify that risk in the second part of his question.
On the first part of my hon. Friend's question, the reduction in base rates since their peak has reduced the cost base of British industry by £9 billion and has reduced the cost to a typical family with a £30,000 mortgage by £110 a month. It is precisely because we recognise the value of those reductions that we are so determined not to jeopardise the success that we have achieved in bringing inflation down and creating the opportunity for stable growth.