Interest Rates (Hansard, 30 June 1994)

§ 3. Mr. Nigel Griffiths
To ask the Chancellor of the Exchequer what is the current policy on interest rates.

§ 8. Mr. Skinner
To ask the Chancellor of the Exchequer what recent discussions he has had with the Governor of the Bank of England regarding interest rates.

§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)
The minutes of my discussions with the Governor which precede my decisions on interest rates are now published. I refer both hon. Members to the minutes published on 22 June.

§ Mr. Griffiths
If there is any confidence in the Chancellor's policies, why are longer-term interest rates in this country rising faster than those in Italy, America, Germany, France and other comparable countries?

§ Mr. Clarke
There has been some rise in long-term interest rates throughout the western world. In my opinion, that has happened because the markets have overreacted to fears of inflation in north America and across western 929 Europe. The best reaction that I can give is the one that I am giving—to introduce the most open system of monetary policy in the world, so that people can see that we are setting our monetary policy on a basis that will deliver the low inflation target to which the Government are committed. The exchanges a few moments ago made it clear that we are well on the way to delivering that.

§ Mr. Skinner
At the beginning of this year, the interest rate on 10-year bonds in Britain was just over 6 per cent. It is now almost 8½ per cent. That is a massive increase by any standards, and higher than that in most industrialised countries. Does that not mean that the next move in interest rates will be up and not down? That will mean more unemployment. We have more taxes at the end of this year and more taxes next year. The best advice that I can give the Chancellor is to take the Chief Secretary with him to the meetings with the Governor of the Bank of England because the Chief Secretary is telling a story in other parts of the world different from the one that the Chancellor is spreading here.

§ Mr. Clarke
Apparently, the Chief Secretary and I have to go to Spain and Germany respectively before anyone takes any notice of our speeches. Leaving that to one side, however, the fact is that we have the lowest short-term rates in this country since 1972. Since the beginning of this year, long-term rates have gone up, for the reasons I have just given. As the hon. Gentleman knows, however, they have come down again to the present level of about 8½ per cent., and they will stay down if we can make it clear to the markets that we have control of inflation, as we most undoubtedly have. We do not have a problem, because the fundamentals are more sound than they have been here for a generation. Indeed, I have just revised upwards my forecast for economic growth and revised downwards my forecast for inflation because we have the best combination of circumstances for the medium future that we have had for many years.

§ Sir Peter Tapsell
Will my right hon. and learned Friend continue to remind his advisers, especially those in the Bank of England, that the present weakness of the United States dollar against the Japanese yen and European currencies is not a cause for a fundamental reappraisal of our policy of trying to get lower short-term interest rates? The weakness results from the delay, caused by the Japanese financial year window-dressing—[Interruption.]

§ Madam Speaker
Order. A question, please.

§ Sir Peter Tapsell
Does my right hon. and learned Friend understand that the weakness results from the repatriation of Japanese yen on the sale of US Treasury bills, some of which funds are now being put into European investment instruments, because the Japanese expect European interest rates to continue to fall?

§ Mr. Clarke
I am sure that my hon. Friend and the hon. Member for Bolsover (Mr. Skinner) will take that point forward in long conversations for the remainder of the afternoon. Our position in the exchange markets has been extremely steady. Our position is well appreciated abroad because we have the fundamentals right. I will continue to set British monetary policy on the basis of British conditions, looking at our money supply, our asset values and our exchange rates, and getting the balance right in 930 strengthening recovery which can be sustained because it is based on a low target for inflation. We are well on course for that at the moment.

§ Madam Speaker
After those long exchanges, I would like a direct question from Mr. Taylor.

§ Mr. Ian Taylor
I will endeavour to oblige, Madam Speaker. Does my right hon. and learned Friend agree that stability in interest rates at the short end is entirely dependent on his maintaining the current fiscal balance to avoid there being a return of inflationary fears? That means not only a restraint on public expenditure, but a continuation of the current policy towards taxation.

§ Mr. Clarke
Yes, Madam Speaker.

§ Mr. Beith
To make that absolutely clear, does the Chancellor agree that the pressure to use higher interest rates to restrain inflation will be very much greater if, at a time when the economy is becoming more active, there is the expectation of tax cuts? Had he better not warn those of his hon. Friends, other than the hon. Member for Esher (Mr. Taylor), that the expectation of tax cuts could damage his chances of keeping interest rates down?

§ Mr. Clarke
The need for brevity has prevented me from being as expansive as I would have wished, both to my hon. Friend the Member for Esher (Mr. Taylor) and to the right hon. Member for Berwick-upon-Tweed (Mr. Beith). There is a very great deal in what they say. That is why I keep reiterating my determination to deliver our fiscal policies and to return to this Government's agenda of tax cutting only when it is sensible to do so because we have public spending and public borrowing under control through the prudent combination of policies that we are now pursuing.

§ Mr. Budgen
Will my right hon. and learned Friend acknowledge that many of us are very relieved to hear that monetary conditions in this country will be set according to British conditions? If there were ever such a disaster as a single currency, for which my right hon. and learned Friend has been campaigning for the past 30 years, would we not then have our monetary policy set according to European conditions?

§ Mr. Clarke
I missed my hon. Friend in Bonn, as he has heard me on that subject many times before over the past 20 or 30 years, but he will be glad to know that I did not take the matter any further yesterday. I made it clear that we would address the subject only in the context of the views of the British Parliament of that time and that I thought that the Bundestag and the Bundesrat of the day would expect the same right if ever the same situation arose. I believe that the German constitutional court would insist on that. I said to my German audience that in my opinion we were right to opt out of the artificial timetable towards economic monetary union, and that events have proved us right. I also said that it was a waste of time going back to blueprints for economic and monetary union, and that we should get on with the business of convergence on low inflation and healthy public finances. As usual, I was commended by my German audience for my frankness and candour in explaining the British position to them.

§ Mr. Gordon Brown
On the Chancellor's speech in Bonn last night, and on the question not so much of a Britain at the heart of Europe as of divisions at the heart of 931 the Treasury, will the Chancellor now take the opportunity to disown the view of the Chief Secretary to the Treasury that a single currency threatens our sovereignty, is unwanted, is impossible and the principle unacceptable —yes or no?

§ Mr. Clarke
My right hon. Friend the Chief Secretary tells me that that is not an accurate quotation. [Interruption.] The hon. Gentleman is obviously doing myself and my right hon. Friend the courtesy of actually reading our speeches, as opposed to the interpretation put on them. He will profit by doing so and he will see clearly from both our speeches what the consistent policy of the Government is towards the kind of arrangements in the European Union that we British Conservatives want to see and which we demonstrated last weekend that we are determined to attain.