HL Deb 14 January 1985 vol 458 cc786-91

3.48 p.m.

The Minister Without Portfolio (Lord Young of Graffham)

My Lords, with the leave of the House, I shall now repeat in the form of a Statement the Answer to a Private Notice Question being given in another place by my right honourable friend the Chancellor of the Exchequer. The Statement reads as follows:

"Movements of the exchange rates on the markets over the past few days have been fully reported.

"As my predecessor made clear to the House on a previous occasion, successive Governments have made it their practice not to make statements about the level of the exchange rate; and like him I do not intend to depart from that practice.

"So far as interest rates are concerned, the Bank of England announced this morning that its minimum rate for lending to the discount market would be 12 per cent.

"This demonstates the Government's resolve to maintain sound monetary conditions and to take whatever steps are necessary to ensure continued success in the battle against inflation."

My Lords, that concludes the Statement.

Lord Stoddart of Swindon

My Lords, I thank the noble Lord for repeating that Statement. However, bearing in mind the magnitude of the problem in the exchange markets, the Statement was a very short one and I shall therefore ask the noble Lord a number of questions. Will the Government now recognise the generally accepted fact that their economic policy is a shambles and that its inadequacy has been emphasised by the incompetence and vacillation of the past week? Indeed, that vacillation and incompetence was compounded over the weekend.

Will the noble Lord also confirm that interest rates are now at the same level as the Government inherited in 1979 and that, although public expenditure has been slashed as never before and unemployment forced up to record levels, lower interest rates have not been achieved by those policies?

Can we be told just exactly what the Chancellor's exchange rate policy, if any, now is? Is the pound soon to be left once more to be determined by market forces, or is today's open intervention an admission that the Chancellor's supine posture and inactivity have been a major contribution to the crisis? Do not the events of the past week show that the market has rumbled the Government? Does not the slump in the value of the pound indicate a complete lack of confidence in the Government's overall economic policy and their much-vaunted economic recovery for 1985?

I have one or two specific questions. How will the 12 per cent. interest rate affect mortgage interest rates? Will house buyers once more have to suffer a 2 per cent. or perhaps even 3 per cent. increase in their mortgage rate? How will the new strategy—because that is what it is—affect recovery during the present year? Will not high interest rates dampen even further economic activity and hit even harder manufacturing industry? Finally, does the noble Lord agree that the Chancellor's policy, reiterated only a week ago, that interest rates should be determined by the market has been a disaster for the economy and, indeed, as today's events show, a humiliation for the Chancellor himself?

Lord Diamond

My Lords, if I were sitting on the Benches behind the noble Lord the Minister who has just repeated the Statement I would feel the same uncertainty now as I have been feeling since the last General Election as to what was the Government's real policy with regard to maintaining a strong pound. One thought that one always knew what was the Conservative Party's attitude to the pound. It was a justifiable attitude on a very difficult issue.

We have now been told time and time again from that Dispatch Box that the Government are not willing to interfere in any way to affect the pound-dollar rate or the issue of what was generally known as a strong pound. We have been told that time and time again. Does not today's extremely short and totally unconvincing Statement leave us in the same position—that the Government have up to now attempted to turn their back on the issue merely because it was a difficult one? Do not we all know that there is no such thing as a Government being able to turn their back on issues affecting the nation? By turning their back they are merely giving their blessing to whatever is happening. They are giving their blessing to the weakening of the pound by some 50 per cent. since they came to power. That is an enormous change.

Surely the noble Lord the Minister owes it to the House to explain what is now the Government's policy. We are totally in the dark. The Statement has added nothing. I beg him to realise how seriously most people regard the issue. For example, have the Government decided that it is better to let the pound slide, have greater exports, and put up with the increased cost of imports? Have they decided that the opposite is the case? Have they decided that there is a particular point at which they must interfere and change their policy completely? We all know that it is a difficult issue, but surely this House is entitled to hear from the Government what their stance really is.

Lord Young of Graffham

My Lords, I thank the noble Lords, Lord Stoddart of Swindon and Lord Diamond, for their statements. I do not think that it will come as a complete surprise to the House if I say that I do not agree with any of their statements, but I believe I shall be able to deal with the questions that were put. First of all, the Government themselves have no exchange rate target. The exchange rate may to some extent reflect concerns about monetary conditions and the level of public borrowing and expenditure, but it is the practice of the Government to intervene in the market to seek to smooth sharp movements and to maintain orderly markets. The Government's policy—and it is one that they stand by—is to do whatever is necessary to maintain the fight against inflation. As to whether the Government's policy is working, I believe that the fact that we are in a year of record investment, which has not before been exceeded, is testimonial to the Government's anti-inflation policy being successful.

As to whether the building societies will change their mortgage rates, that is a matter of commercial judgment for the building societies and the banks. It is not, of course, a matter for the Government. But the Government will look at the exchange rate. That is not to say that they will have precise targets for the exchange rate or that they will be totally indifferent to it. The Government must have regard to all the circumstances at the time.

We cannot continue to behave as if financial markets do not exist, but the Government will not take risks on monetary policies and they will not take risks on inflation. Interest rates are bound to fluctuate. As always, the priority of this Government and of my right honourable friend the Chancellor of the Exchequer is to maintain downward pressure on inflation through control of monetary conditions, and that way continue the growth towards prosperity.

Lord Maude of Stratford-upon-Avon

My Lords, while I understand the logic of the Government's broad economic strategy, when we have a large and apparently intensifying bear position open in sterling, does it really make sense to fill the weekend newspapers with official and semi-official statements and hints to the effect that the Government never intend to interfere in the exchange markets? Instead of giving open encouragement to the bears to extend their positions, would it not be sensible at least to give a hint that the Government might intervene without warning and squeeze the bears, to their considerable loss?

Lord Young of Graffham

My Lords, I thank my noble friend for his question. I say merely that to my knowledge there was no particular Government statement. When I read the Sunday papers, I found two totally conflicting headlines. I suppose, had I put the two together, they would have cancelled each other out. What I think the Government have done today has been to demonstrate beyond any shadow of doubt that they intend to maintain their course of anti-inflationary policy.

Lord Harris of Greenwich

My Lords, is the noble Lord aware that one of the two conflicting statements in the weekend press to which he referred came from No. 10 Downing Street and the other from the Treasury? Would it not be a better idea to avoid two departments making totally contradictory statements on a matter of central importance to the living standards of the people of this country?

Lord Young of Graffham

My Lords, the noble Lord is privy to information which I do not have, and neither, I suspect, do No. 10 or the Treasury. My information is that there was no particular statement emanating from either area. The interpretation of the press is a matter for the press. May I remind your Lordships' House that at the present time the press is not under the control of the Government.

Lord Thorneycroft

My Lords, whatever conflicting statements may have been made by the press over the weekend, is the noble Lord aware that the Government are much to be congratulated on the firm action they have taken as well as on the brevity with which the statement on it was delivered?

Lord Young of Graffham

My Lords, I am grateful to the noble Lord.

Baroness Seear

My Lords, if I am correct in understanding the Minister to say that the Government were prepared to intervene to do what they considered necessary, that presumably implies that they have some definition of what is necessary and that is the core of some sort of policy. From what the noble Lord has told us we can only conclude that the Government's position is not that they do not have a policy, but that they are prepared not to be pro-active about it but merely to react, normally too late.

Lord Young of Graffham

My Lords, I thank the noble Baroness for her statement. I say merely that the Government's policy remains that the Bank should intervene, if necessary, to seek to smooth sharp movements and maintain orderly markets. The precise level of the exchange rate is a matter which the Government will neither set nor be totally indifferent to. The Government and my right honourable friend the Chancellor of the Exchequer have always said that there is no such thing as an exchange rate target. But the present and precise level of exchange is a matter which must always be taken into account.

Lord Boyd-Carpenter

My Lords, in view of the doubts now being expressed about the United States dollar, in the light, in particular, of the American Government's massive borrowing requirement, is it not likely that the pressure on sterling which has occasioned this action by the Government will be of short duration? Are we not entitled to hope that a return to lower interest rates and a stronger pound is a very likely possibility?

Lord Young of Graffham

My Lords, the advantage and the disadvantage of a free and floating market is always its uncertainty. I should hope that the prompt action taken by the Government today would ensure that we shall shortly return to the same level of interest rates as before.

Lord Oram

My Lords, if on one day a Government are reluctant to approve the action of banks in raising their interest rate by 1 per cent., and then on the next day they order the banks to raise their interest rates by a further 2 per cent., can that situation fairly be called a U-turn? Did the Minister at lunchtime see the interview with Sir John Hoskyns, a close adviser and supporter of the Government? If he did, did he notice that Sir John seemed to be flabbergasted by the fact that, as he saw it, neither market forces nor the Government seemed to be working as in theory they should?

Lord Young of Graffham

My Lords, to my knowledge, Sir John Hoskyns, the Director General of the Institute of Directors, is not at the present time an adviser to the Government, and was no doubt expressing his own view. Possibly the problem is that the markets have heard siren voices continually urging the Government to relax and believe that the Government might do so. But the Government have demonstrated today that there is no U-turn and the Government are not going to let up on their present and future anti-inflationary policy. The control of inflation is the route back to prosperity.

Lord Stoddart of Swindon

My Lords, is the noble Lord aware that the replies which he has just given lead me to be very depressed indeed? What he is in fact saying is that the Government have no strategy at all about an issue which will affect the whole of our economy, particularly unemployment. Bearing in mind his particular portfolio, is he in fact saying that inflation is still to take priority over all else? If that is so, will he say to what level the Government will allow unemployment to rise before they adopt some proper exchange rate policy? Alternatively, are we to have a continuation of the policy that has operated since 1979, during which period unemployment has gone up by 2.5 million?

Lord Young of Graffham

My Lords, I am depressed that the noble Lord is depressed at my answers because I thought I had made the position of the Government extremely plain. The Government will continue with their policy of keeping inflation down. In the Government's view, that is the only way back towards the road towards fuller employment and the road towards profitability. What has been demonstrated in each year since 1979 is increasing investment, until this year it is at a record level. I must remind your Lordships' House that if we look at employment in this country, within this country we have 66 per cent. of all adults of working age employed, compared with 61 per cent. in Germany and 60 per cent. in France. What we must do is to bring back, by the control of inflation, investment, growth and productivity.

Lord Seebohm

My Lords, would the Minister agree that since 1979, after that oil hike, never in the history of the money markets has there been so much money sloshing around owned by international bodies and individuals? Would he further agree that if we had adopted the policy which I imagine the Opposition Benches wish us to adopt, and intervened in the market, we could very well have used up our entire reserves with very little effect?

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Seebohm. The amount of money washing around in today's market is such that intervention in the way that was formerly the practice would, I suspect, have very little effect.

Lord Cledwyn of Penrhos

My Lords, given the sharp decline in the value of the pound over the last few weeks, and specifically over the last 10 days, why did it take the Government so long to take this so-called firm action?

Lord Young of Graffham

My Lords, the position changed over the weekend, partly as a result, I have no doubt, of speculation in the press and elsewhere. But the position is a fluid one and it changes, and, at the time when my right honourable friend the Chancellor of the Exchequer thought it proper to act, he acted.