Interest Rates (Hansard, 27 October 1981)

§ Lord Beswick
My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.

§ The Minister of State, Treasury (Lord Cockfield)
My Lords, my right honourable and learned friend the Chancellor of the Exchequer has discussed the level of interest rates with his counterparts from Governments of the European Community and other states on various occasions in recent months. At these meetings the Governments of several major European and other industrial countries have renewed 902 their commitment to the firm fiscal and monetary policies which hold out the best prospect of lower and more stable interest rates for the longer term. This message emerged strongly from the September meeting of the IMF Interim Committee, the advisory group representing the whole membership of the fund.

§ Lord Beswick
My Lords, as always, I am much obliged to the noble Lord for his Answer. However, does he not remember that when I put down this same Question on 15th June he then told me that the initiatives that I had in mind would not be useful but that the Government relied on: firm fiscal and monetary policy"? [Official Report; col. 431.] Is it not a fact that since 15th June we have had a firm fiscal and monetary policy? Is it not also a fact that since then interest rates have increased by a further 2 per cent.? Is it not a further fact, despite what the noble Lord said about the IMF meeting, that we are out of step with our French and German friends in making representations to the United States about their high interest rate policy?

§ Lord Cockfield
My Lords, far from being out of step, the position is that the United Kingdom—in common with most other industrialised countries—believes that a firm monetary and fiscal policy is essential as a means of both dealing with inflation and, in the longer term, achieving lower rates of interest. We do, of course, all regard the present level of interest rates as a matter of grave concern, but we need to remember the reasons why those rates of interest exist. Most major countries, including this country, have very substantial budgetary deficits, and it is the existence of those budgetary deficits and the large amount of borrowing that they entail which forced up interest rates to the present level. If I may say so, it was a very considerable achievement on the part of my right honourable and learned friend to have reduced the rate of interest at the time of the Budget and to have kept it down over a period of a good many months.

§ Lord Beswick
My Lords, does not the noble Lord understand that many of us agree with the need for a firm monetary policy? But can he not also see that the high interest rates are, in fact, frustrating that policy? Is it not a fact that they are putting up costs at the same time as he is making his cuts? For example, has the noble Lord noticed that the 2 per cent. extra interest on the Treasury stock issued last month—the 2 per cent. extra, not the shameful total—precisely equals the £20 million cut they are making in the university grant this year? Are we really on the right lines if we cut down on education in order to increase the amount that goes to the moneylenders?

§ Lord Cockfield
My Lords, it is, I am afraid, a fallacy to believe that high interest rates add to inflation. They have precisely the reverse effect. They represent one of the major weapons in getting inflation under control. It is because of the burden of interest to which the noble Lord rightly draws attention—we are just as much concerned about it as he is—that we need to follow not only a strict monetary policy but a 903 strict fiscal and financial policy as well. This in fact is what underlay my right honourable friend's strategy at the time of the Budget.

Lord Morris
My Lords, would not my noble friend agree that so much misunderstanding on this particular point arises from the fact that interest rates are more a symptom than a cause?

§ Lord Cockfield
My Lords, I am obliged to my noble friend for his intervention. Interest rates of course are the result of the need to borrow large sums of money. The need to borrow large sums of money flows from the size of the Budget deficit, and that is why it is important to do everything possible to bring the size of the Budget deficit down.

§ Lord Shinwell
My Lords, may I ask the noble Lord, Lord Cockfield, a question? He informs your Lordships' House that high interest rates have a beneficial effect so far as inflation is concerned; they do not increase inflation. If they are not detrimental to inflation, then why not allow interest rates to increase, and have the uncertainty, so that inflation can be controlled?

§ Lord Cockfield
My Lords, I appreciate the dilemma that the noble Lord is trying to pose, but I think we must recognise what an important burden interest rates are on the individual business as well as on the individual, and our policies are directed to bring interest rates down when that is possible.

The Earl of Halsbury
My Lords, do we need to couple the interest rate we use to defend the purchasing power of our currency to the interest rate necessary to control inflation within the economy? At the moment it would appear that the tail is wagging the dog and we are controlled by American rises in interest rates to defend their foreign exchange position, rather than that necessary to defend our economic position.

§ Lord Cockfield
My Lords, the present level of interest rates depends upon domestic as well as on international factors, but it is quite impossible to separate the one from the other. We could not in practice, having regard to the very large proportion of our gross national product which comes from international trade, live in isolation inside a ring fence.

Lord Bruce of Donington
My Lords, will the noble Lord explain why it is that the adviser to the Prime Minister, Mr. Alan Walters, at the time of his appointment went on the record as saying that high interest rates were in fact a contribution towards inflation? Will he endeavour to see that those views are reconciled with his own on this matter?

§ Lord Cockfield
My Lords, I would be happy to read the speech of Professor Alan Walters, to which the noble Lord refers, and I have no doubt that Professor Walters would let the noble Lord know his views on that subject.

§ Lord Beswick
My Lords, may I just ask the noble Lord whether he does not think it is possible that the 904 high interest rate policy has something to do with the facts which were reported in the Monthly Economic Assessment two months ago, that in the case of non-oil companies in this country their undistributed income fell by one-third while that contrasts markedly with that of the financial companies and institutions whose undistributed income doubled in the same period"? Is not this what is happening in our economy at the present time? We are frustrating the useful wealth producers in order to reward, or in fact are actually rewarding, the moneylenders?

§ Lord Davies of Leek
Usurers, not moneylenders.

§ Lord Cockfield
My Lords, it is of course the position that in a period of inflation there is a considerable redistribution of income between different sectors in the economy. These are sometimes redistributions which give rise to criticisms of the kind to which the noble Lord refers, but the answer to this is to eliminate inflation and the need for interest rates at this level. It is not simply to complain about the results.