HC Deb 02 February 1995 vol 253 cc1206-9
7. Mrs. Ann Winterton

To ask the Chancellor of the Exchequer when he will next discuss with the Governor of the Bank of England the level of bank rates.

10. Mr. Foulkes

To ask the Chancellor of the Exchequer what factors are taken into account when decisions are made regarding bank rate changes during his discussions with the Bank of England.

Mr. Clarke

I held one of my regular meetings with the Governor of the Bank of England to discuss monetary developments this morning. The factors that I take into account in decisions on monetary policy are set out in the medium-term financial strategy, and the minutes of my monthly meetings are now published.

Mrs. Winterton

In his discussions with the Governor of the Bank of England earlier today, did my right hon. and learned Friend say that moves towards a single currency in Europe are anathema, not least because of our bitter experience of the exchange rate mechanism, when bank rates were at an unsustainable and intolerably high level, afflicting both business and home owners alike?

Mr. Clarke

I will not argue history with my hon. Friend, because inflation and interest rate increases began well before we joined the ERM. While we were in the ERM, we began the steady and sensible process of reducing both interest rates and inflation. I commend to my hon. Friend the speech by the Governor of the Bank of England recently on the subject of economic and monetary union. I have been urging for some time that we have a more sensible debate in this country on whether economic and monetary union might be of advantage to this country. I was delighted that the Governor of the Bank of England decided to participate in that debate. He was good enough to show me a copy of his speech before delivering it. It is excellent and I commend it to all those with a serious interest in the subject.

Mr. Foulkes

Does the Chancellor realise that his cosy tête-a-têtes over the past five months with the Governor of the Bank of England have resulted in an increase of £45 a month in the average mortgage? How does he expect the ordinary wage earner—not Sir Iain Vallance or Cedric Brown but the people whom they employ—to pay the extra that he has imposed?

Mr. Clarke

I am sometimes accused of having cosy tête-a-têtes with the Governor of the Bank of England and, at other times, unavailing struggles against him in our titanic clashes. [Interruption.] This country is simply not ready for open government. The minutes of the meetings that we publish show that we are both firmly agreed on delivering sustained growth with low inflation. As a leader in The Times recently acknowledged, by doing that last year we succeeded in producing the strongest economy in Europe and arguably the healthiest economy in the developed world.

Mortgage costs are now far higher—lower— [Interruption.] Mortgage costs are far lower than they were in 1990 when they last reached their peak. If I took the advice of Opposition Members and lost control of inflation, mortgage costs would rise to great heights. When inflation and taxation are taken into account, the average person's living standards are expected to rise in 1995.

Mr. Yeo

Will my right hon. and learned Friend ignore the mindless chants from Opposition Members, whose thinking on interest rates has not advanced from the point of saying that they should be 1 per cent, below whatever level they happen to be? Does he agree that it is in the long-term interest of all borrowers, both corporate and personal, that interest rates increase from time to time, as that helps to achieve the long-term inflation objectives that he has set out?

Mr. Clarke

I am grateful to my hon. Friend. I am afraid that he accurately describes the level of discussion with the Opposition that we usually have on interest rates. The key judgment that must be made is how to sustain this recovery. That involves taking the necessary decisions to ensure that inflation does not get back into the system. Small business men, house purchasers, and people in the real industrial economy, whose interests are at the forefront of my mind, would suffer most if I lost control of inflation at a time when our recovery is doing so well. This recovery will last. We shall not return to boom and bust, and that involves ignoring the flippant advice of the Labour and Liberal parties on how to set interest rates.

Mr. John D. Taylor

Would it be wise Government policy to continue increasing interest rates in advance of a general election?

Mr. Clarke

I have already given one description of the usual political debate on interest rates. I have deliberately made monetary policy more transparent to try to stop interest rates being treated as such a knock-about political subject. People will stop regarding interest rates as a knock-about issue and allowing political considerations to intrude when they see us continuing to deliver the sort of growth rate, falling unemployment, new job creation, high standards of productivity and high export volumes that we have so far delivered. If we keep on delivering those to an election, the views of any of the Opposition parties on interest rates will be regarded as totally irrelevant.

Mr. Elletson

What effect would there be on interest rates if we removed spending controls on local authorities and created a new tier of local bureaucracy with regional councils? Is that not another example of Labour policy that would cost billions of pounds and destroy jobs?

Mr. Clarke

It certainly would. But as my hon. Friend acknowledged in passing, it is only one of many policies to come from the Labour party which would undermine our control of public spending and would lead either to increased taxation—as the Liberals claim—or to increased borrowing, which would have a destructive effect on monetary policy. It is the very combination of sensible control of public spending, tight fiscal policy and a sensible and consistent monetary policy that has created the financial conditions that currently make us one of the wealthiest economies in the industrial world.

Mr. Darling

Can the Chancellor confirm that a typical householder will pay £800 a year more as a result of today's interest rate rises? Is not it true that, because of that, before too long, the Chancellor's political instincts will start to dominate consideration of changes in interest rates and override the advice from the Governor of the Bank of England in order to placate Conservative Back Benchers?

Mr. Clarke

First, I do not believe that a half per cent. rise could produce an £800 a year difference, as the hon. Gentleman said. Secondly, as far as I am aware, no building society has announced that it is putting up its rates, although it might—I have no control over that. As I have already said, next year, taking account of inflation and taxation, the average family can expect an increase in its personal disposal income and average earnings should rise by about £5 a week. The overall living standards of this country are best protected by sensible economic policies. We can look forward to increasing prosperity and more secure employment for our people as long as we keep on the successful track that we mapped out last year.