HC Deb 04 February 1993 vol 218 cc461-2
3. Mr. Hoon

To ask the Chancellor of the Exchequer what factors the Government will take into consideration in deciding when to rejoin the exchange rate mechanism.

Mr. Lamont

I set out the conditions for rejoining the ERM in my letter of 8 October to the Chairman of the Treasury and Civil Service Select Committee.

Mr. Hoon

Given that what now passes for Government economic policy involves the persistent devaluation of the pound, and given the chronic uncertainty that that causes for British business, when can we expect the British Government to go back to their previous policy of managing the exchange rate?

Mr. Lamont

The Government have made it clear again and again that we do not seek a depreciation of the currency, but we have made it clear that interest rates will be set according to a range of factors. That includes domestic money conditions, asset prices—particularly house prices—and also the exchange rate. The exchange rate will continue to be among the factors that we take into account in assessing interest rates, and markets should remember that interest rates can go up as well as down.

Sir Peter Tapsell

Has my right hon. Friend noted that when, yesterday, Japan reduced its discount rate to 2½ per cent., the lowest base rate in the developed world, the Japanese yen strengthened against the European currencies and against the United States dollar? Does not that demonstrate yet again that the quality of industry and the level of investment in research and development ultimately determines exchange rates, and not political manoeuvres by politicians, often with little commercial experience, as exemplified by the disastrous experiment with the exchange rate mechanism and the unrealistic economic and financial convergence criteria of the Maastricht treaty?

Mr. Lamont

I hope that my hon. Friend is not suggesting—I am sure that he is not—that the recent reduction in interest rates was other than fully justified and justified by economic criteria. I certainly believe that it was. It was based on the advice of the Bank of England; it was based on what is happening to money supply and to asset prices. I believe that the reduction in interest rates that we have had was very fully justified and a good decision.

I agree with what my hon. Friend says about Japan, but the markets, in their reaction to Japan, also take into account the fact that they have a very low rate of inflation and they have a near to balanced budget as well. That is part of Japan's strength, and my hon. Friend should remember that as well.

Mr. Andrew Smith

Does the Chancellor agree that the activities of speculators inflict enormous damage on prospects for trade, for investment and for jobs? Should not he now tell the House what the true cost of Black Wednesday really was? What proposals will he bring forward to tackle the power of the speculators? While he is at that, will he answer one very simple and important question: does he believe in managed exchange rates or in floating exchange rates? Opposition Members have had enough of his casino economy.

Mr. Lamont

As regards what the hon. Gentleman has said, I do not entirely agree with him about speculation in foreign exchange or other markets. Speculation is a fact of life. The truth is that Opposition Members have never adjusted to the fact that we live in a global economy. That is why they are so hostile to inward investment. They think that we can pursue policies on our own, regardless of the world outside.

As regards the hon. Gentleman's question on exchange rate policy, I am astonished that he should put it to us. We are totally at a loss to know whether the Labour party wants or does not want to join the exchange rate mechanism again.

Mr. Marlow

Given the recent devaluation of the Irish punt and yesterday's pressure on the Danish kroner, would it be a good thing or a bad thing for the United Kingdom if the exchange rate mechanism were to collapse altogether?

Mr. Lamont

I do not believe that it would be in the interests of this country if the exchange rate mechanism collapsed, as my hon. Friend said. I have, however, made it clear to the House on many occasions that I do not think that, in present circumstances, we can contemplate rejoining the ERM as long as economic conditions in this country and in Germany are not in step. I am sure that the whole House will want to join me today in welcoming the reduction in German interest rates which has taken place. It is something which I think should have taken place somewhat earlier.