The Exchange Rate (Hansard, 18 November 1982)

§ The Secretary of State for Trade (Lord Cockfield)
My Lords, with the leave of the House, I will now answer the Private Notice Question asked earlier this afternoon by the noble Lord, Lord Kaldor.
648 My Lords, the movements of the sterling exchange rate in the markets this week have been fully reported. Successive Governments have made it their practice not to make statements about the level of the exchange rate. I do not intend to depart from that practice.
There are, however, two points that should be made. First, the noble Lord asked about exchange rate policy. Let me assure him, and the House, that there has been no change in the policy of this Government, which has continued to be that the exchange rate should reflect market forces. Secondly, let me similarly assure him that the Government are determined to maintain firm monetary conditions conducive to success in the fight against inflation. We back that up by determined control of public expenditure, and by reducing public borrowing as a share of national output. As my right honourable and learned friend the Chancellor of the Exchequer made clear in another place, we shall maintain these policies.

§ Lord Kaldor
My Lords, I am sure all noble Lords will be grateful to the noble Lord for giving us his Answer to the Private Notice Question which I asked earlier. Nevertheless, I should be grateful if the noble Lord would supplement that Answer in at least two respects. The first is whether he would agree that, as the current exchange rate is still very much higher, in terms of relative cost per unit of output between British and foreign manufacturers, than it was in the 1970s or in any earlier period, any downward movement of the exchange rate should have a helpful effect on industrial recovery even though it may delay the pace of reduction in the rate of inflation.
Secondly, in the light of this, the House would be glad to have the noble Lord's assurance that the Government will not allow speculative forces in the foreign exchange market to deflect them from their declared policy to bring down interest rates as fast as economic and monetary conditions permit.

§ Lord Cockfield
My Lords, as I have said, the exchange rate is determined by market forces; it is not in fact determined by the Government at all. So far as the level of costs in the United Kingdom is concerned, there is a heavy responsibility on both sides of industry to ensure that costs are kept down as far as possible. That is the best way to meet competition from other countries. So far as a depreciation in the value of the pound is concerned, that may have an immediate effect on export prices and prospects, but it equally has effects in the opposite direction. The important thing is to ensure that we restrain increases in our own cost levels, and these are matters within our own control.
The Government will continue to follow a strict financial and monetary policy. That, of course, is really the answer to the noble Lord's second question: that, so far as interest rates are concerned, these are very largely influenced by financial and monetary policy. We shall continue to maintain a strict policy on both these fronts, and that is the best prospect for a continued reduction in rates of interest.

§ Lord Tanlaw
My Lords, we are grateful to the noble Lord for answering this Private Notice Question. From these Benches, we should like to ask two questions. As Government policy is attempting to 649 reflect market forces, will the noble Lord give an undertaking that the Government's policy will do something about those forces when they become too sudden or too violent, as they may have been in these last two days? Secondly, would the noble Lord perhaps now reconsider British entry into the European monetary system, now that the pound sterling is at a more reasonable rate, when this would be more acceptable?
Thirdly, can the noble Lord indicate that, although this is beneficial to many parts of industry, there is one sector of industry where the fall in the value of the pound sterling is particularly non-beneficial—namely, the United Kingdom oil producers and, in particular, Britoil? Will he perhaps, even at this late hour, reconsider the possibility of postponing the launch of Britoil in view of the recent fall in sterling which must, in effect, alter its figures and projections?

§ Lord Cockfield
My Lords, the noble Lord asked whether the Government would do something about market forces if they produced large movements in the exchange rate. The short answer is, first, that the fall that has occurred is, in fact, a moderate fall; it is a fall of approximately 4 per cent. in the last week. What has drawn so much attention to it is the suddenness with which the fall has occurred. The position is that over the last 12 months the effective value of the pound has fluctuated between about 87 and 93, and the pound is still within that broad band.
As regards the noble Lord's second question, namely, membership of the EMS, the answer is that we are members of the ÈMS. What we are not members of is the Exchange Rate Mechanism. This is a very technical issue. We do, of course, keep it under constant review, but we have not felt that the time is right for our entry into the Exchange Rate Mechanism. Indeed, the substantial movements which have occurred in other currencies during the last few months indicate the difficulties to which membership of the Exchange Rate Mechanism gives rise.
As regards the noble Lord's final question, there is no question of reconsidering the launch of Britoil, which I am sure we all hope will go off very well indeed. In fact, oil prices are set in terms of dollars and not in terms of pounds at all.

Lord Bruce of Donington
My Lords, is the noble Lord aware that his statement that the Government have no exchange rate policy is merely an expression of present ambiguity rather than of past history? Is he further aware that in point of fact from the latter part of 1979 it has been the Government's policy deliberately to drive up the rate of exchange by their extremely abrupt rise in the interest rates—indeed, so much so that the noble Lord's right honourable friend the Prime Minister was six months thereafter boasting of the high exchange rate, that the pound could look the dollar and every other currency in the face?
Will the noble Lord also bear in mind that his observations about the lower rate of exchange now having a corresponding effect on imports, are not precisely accurate in the sense that only about 12 per cent.—excluding food—of the country's imports come from the import of raw materials, and that the remain- 650 der of the imports, which have been grossly accentuated in terms of import penetration by the Government's policies, is in respect of manufactured goods? Moreover, this will in fact bring a very welcome respite to the manufacturing industries in this country that have been progressively destroyed by this Government's policy and undermined by the exchange rate policy that they have in the past deliberately adopted.
Will the noble Lord answer a further question as to what effect he anticipates the existing rate of exchange—if it is maintained at its low level—is likely to have on the interest rates which, contrary to his observation and assertion, are, of course, fundamentally dependent upon Government policy?

§ Lord Cockfield
My Lords, I am happy to assure the noble Lord once again that I do not agree with any of his theories on this particular subject. The position is that the Government do not determine the exchange rate: it is determined by market forces. That was so when the pound rose steeply in value in 1980, and it is now the position when the pound has fallen modestly in value. The fact that market forces can result in a movement of the pound in either direction demonstrates clearly that what I say (that the value is determined by market forces) is entirely correct.
The noble Lord then embarked upon the question of the effect of a lower rate of exchange on the economy. I had hesitated to embark upon a long dissertation on this particular subject. This was not because I was unwilling to do so, but because I felt that it was going a little wide of the original Question. The point I was making was that although a fall in the exchange value does appear to have and, indeed, does have, a beneficial effect on exports—although if we are dealing with a 4 per cent. fall the effect is equally modest—it also sets in train other forces which may cancel out that benefit. I was not attempting, and do not attempt now, to make any assessment of what the resulting effect of those varying forces will be.
Thirdly, the noble Lord asked me what effect we anticipate there will be on interest rates. There are a whole variety of factors which go into the determination of interest rates. One of the most important of all is the Government's own financial policy and the level of their borrowing requirements. As the noble Lord will be aware, for the first time since 1977 the planned public expenditure for next year shows no increase as a result of the autumn review. This indicates that we are continuing to keep a tight grip on the level of Government expenditure. Secondly, we are continuing with our policy of reducing borrowing as a proportion of the gross national product, and that is another force which will help to keep interest rates down.

§ Lord Balogh
My Lords, does the noble Lord not consider that market forces cannot be invoked? Market forces, in one rhetoric of the Government, represent long-term market forces which optimise production and consumption et cetera. There are also market forces which are not of that type, and we are confronted with that type of market forces. However, we saw that the pound fell in 1976 to 1.56 dollars; it then rose to almost 2.40 dollars, and it is now back at 1.60 dollars. In the meantime, what has happened? I 651 am able to talk about market forces in the sense that adjustment ought to be made on the basis of those forces—

§ Lord Denham
My Lords, I wonder whether the noble Lord would put his point in question form?

§ Lord Balogh
My Lords, as a matter of fact I did so; but if your Lordships wish to hear it a second time, I am perfectly happy to ask any type of question which you cannot answer. Walrusian market forces are not at all easy to neglect. We are in a situation in which the behaviour of the Government has been extraordinary. Not to have accumulated a large stock of reserves, but to let the pound rise, is such a scandalous thing that it is either wickedness or stupidity; I opt for stupidity.

§ Lord Cockfield
My Lords, numerous explanations have been given by the commentators for the present movement in the exchange rate of the pound. The noble Lord has added his own explanation. As we believe that the value of the pound is determined by market values, we listened to the noble Lord's dissertation, but it does not follow that we agree with it. The Government propose to continue with the strict financial and monetary policy which we have followed hitherto.

§ Lord Kaldor
My Lords, I should like to ask the noble Lord for a simple interpretation of his remarks; whether he interprets the term "market forces" so narrowly as to rule out any intervention in the foreign exchange market by the Bank of England or the exchange equalisation account.

§ Lord Cockfield
My Lords, by "market forces" I mean the well-known forces of supply and demand. I was unaware that that was a controversial statement. As regards the policy of the Bank of England, what in fact the Bank does is no more than to smooth out sharp movements which occur in the exchange rate over short periods of time.

§ Lord Hankey
My Lords, while welcoming greatly what the Government have said, may I ask whether they share the hope of a great many people, that by market forces interest rates can be kept at the low rates which now appertain, and will not receive encouragement to rise unless it is absolutely unavoidable; and that the Government will continue to encourage the Americans to keep their rates low, since in the past they have tended to drag up our rates?—because low rates of interest are vital to the recovery of our industries.

§ Lord Cockfield
My Lords, I entirely appreciate the points made by the noble Lord. It is not possible, and certainly not our practice, to attempt to forecast the movement of interest rates. There are many factors which enter into this particular equation, including, as the noble Lord so rightly says, the movement of interest rates in the United States of America. What we do is to exercise proper control in the field which, in fact is under our own control, namely, that of our own financial and monetary policy.