Interest Rates (Hansard, 3 March 1994)

§ 10. Mr. Pawsey
To ask the Chancellor of the Exchequer what is the estimated saving to British industry of the ½ per cent. fall in interest rates.

§ Mr. Kenneth Clarke
Every ½ per cent. reduction in interest rates, when fully passed on, is estimated to lower United Kingdom companies' interest bills by well over £½ billion a year.

§ Mr. Pawsey
I thank my right hon. and learned Friend for that extremely helpful good news. Does he agree that a low-inflation, low-tax and low-interest rate economy, such as that of the United Kingdom, is better able to attract inward investment, particularly compared to our EC competitors, which, for example, maintain the social contract?

§ Mr. Clarke
I agree entirely. At the moment, we get about a third of all inward investment in the European Union. We do so because everyone agrees that Britain is the most attractive country in which to invest because of our low rates of taxation, our low rates of corporate taxation, our deregulated economy and our much more flexible labour market.

§ Mr. Sheldon
Will the Chancellor send a clear message to those voices in the City asking him to increase interest rates? Does he accept that the present interest rates should come down if we are to sustain any improvement in manufacturing industry?

§ Mr. Clarke
I shall continue to set interest rates according to British conditions, taking a view about the medium-term prospects for inflation, looking at the monetary aggregates that we use, the exchange rate and asset values. That has guided all my decisions on monetary policy so far, and will certainly continue to do so.

§ Mr. Mans
Does my right hon. and learned Friend agree that although industry always welcomes a reduction in income rates, it welcomes consistency more, so that it can plan ahead, knowing that rates will not rise again? That will give industry the necessary confidence to invest in the future.

§ Mr. Clarke
Industry wants low inflation and a stable environment so that it can do what it has to do to produce the sound growth that we all want. That is why I state so clearly our objectives for monetary policy. I am glad that British industry has benefited from the steady reductions in interest rates since 1990. Altogether, if they are passed on, they are worth about £13 billion to British industry. That has obviously contributed quite a lot to our recovery from the recession, which is steadily becoming stronger.

§ Mr. Geoffrey Robinson
Is the Chancellor aware that the House has been reassured this afternoon by what both he and the Chief Secretary have said about having regard to British circumstances in determining British interest rates? Could he be pushed just a little further on that to see the interrelationship between interest rates and the value of sterling, and the implications of both for British industry? Is he aware that the disinflationary pressures in the British economy make it possible for him both to move downwards on inflation rates and interest rates and to maintain a competitive rate for sterling, the importance of which he referred to a few moments ago?

§ Mr. Clarke
I shall add that to all the advice that I get when making these monetary decisions, which I usually do at my monthly meeting with the Governor of the Bank of England. We have been consistently reducing interest rates since 1990. We have been able to do so because we have been so successful in getting inflation down. That is one reason why the outlook for investment is now so good. We have been able to cushion the blow to those who rely on interest from their savings by introducing the new national savings bond with a fixed rate of 7 per cent. for pensioners who want to take it.