Interest Rates

HL Deb 29 January 1985 vol 459 cc572-81

3.39 p.m.

The Chancellor of the Duchy of Lancaster and Minister for the Arts (The Earl of Gowrie)

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:

"At noon yesterday, following a rise in market interest rates, one of the clearing banks raised its base rate from 12 to 14 per cent. The Bank of England raised its dealing rates by a corresponding amount when it dealt in the bill market at 12.15 p.m. The other clearing banks followed within the next hour or so.

"Yesterday afternoon, I gave evidence on these and related matters at considerable length to the Select Committee on the Treasury and Civil Service, which I understand will be reporting to the House shortly".

My Lords, that concludes my right honourable friend's Statement.

Lord Stoddart of Swindon

My Lords, I should like to thank the noble Earl for repeating the Statement which was made by the Chancellor of the Exchequer in reply to a Private Notice Question in the other place. Does the noble Earl agree that the Statement is not very forthcoming, bearing in mind the seriousness of the position? Is he aware that the recent savage increases in the interest rate, culminating in the 2 per cent. increase yesterday, have sent shock waves throughout the City and the financial markets causing uncertainty and convulsions throughout all our national institutions? That is the seriousness of the matter.

Can the noble Earl tell the House what is the Government's policy on the value of the pound abroad? Is it still that it should float freely or do recent events indicate a radical change in policy? Can he also inform the House what the Government believe to be the correct value of the pound against other currencies? Is it 1 dollar 10 cents, 1 dollar 11 cents, 1 dollar 20 cents against the dollar or what figure? How far are the Government prepared to go in raising interest rates to defend the Government's perceived true value of the pound? Is the figure 14 per cent., which we now have; is it 15 per cent., which we could have tomorrow, or is it 18 per cent. or 20 per cent? What is the figure? Just how high will the Government allow interest rates to go?

Can the noble Earl tell the House, because this is so important, what effect these interest rate rises will have on industry? Is it not likely that industry will stop investing and is that not serious for the country? Is it not likely that these high interest rates will stop the Chancellor's much-vaunted economic recovery in its tracks and also reduce his room for manoeuvre in the forthcoming Budget? Finally, do not the Government deserve the deepest censure for their handling of the economy to date in allowing over-reliance on oil revenues to undermine Britain's manufacturing base, and with it the long-term interests of this country?

Lord Ezra

My Lords, I should like to say that the Private Notice Question was asked by a member of the Alliance in another place. May I reiterate the points raised by the noble Lord, Lord Stoddart of Swindon, in drawing attention to the seriousness of this situation? We are concerned that the answer to this PNQ was given in such laconic terms.

If one considers the movement of interest rates in this country over the past year or so one finds that it is quite staggering. Having been raised to 12 per cent. in the middle of last year, it came down to 9.5 per cent. by the end of the year, then moved up steadily in the course of this year, which is still relatively young, to no less than 14 per cent. The question I should like to raise, in view of the fact that one of the major objectives of economic policy in this country must be the regeneration of industry, is on the basis of these violent moves in interest rates how can we expect that to occur?

Related to that question is the way in which the Government are reacting to movements in the value of the currency. We were told right up to the last minute that this was merely a market phenomenon and that the Government wished to keep their hands off. Then we were told that the Government wished to intervene to make sure that currency did not fall too low and they felt it was too low now. Thus there were these precipitate rises in interest rates.

As a second question, we have to ask whether there is no other way in which the Government can seek to ensure that we have a more stable currency without juggling about with the interest rates. It seems that a situation which could have been prepared for, bearing in mind our dependence upon our oil wealth, was not prepared for. This situation, which might have been anticipated, seems to take the Government completely by surprise. The result of it is that the measures taken to introduce stability into the currency have in turn led to a serious situation for industry.

If we continue in this manner with wildly fluctuating currency values and wildly fluctuating interest rates, we shall surely as an economy be seriously harmed. I should welcome the comments of the noble Earl on those matters.

The Earl of Gowrie

My Lords, as with rather different language both noble Lords on the Front Benches opposite effectively asked me the same questions, perhaps the House will allow me to try to answer them together.

Of course industry does not welcome, any more than anyone welcomes, increases in interest rates; but what counts is the aggregate of those increases overall over a period of time. In this context, I commend the wise words of the director of the CBI, Sir Terence Beckett, as reported in The Times this morning. He said that the base rate rise was no help to industry and had no internal justification. But: steps have to be made to combat international speculation against sterling in the short term. In reply to the noble Lord, Lord Stoddart of Swindon, may I say that there is no target for the exchange rate. However, both noble Lords asked me how this squares with the Government's view of the markets. There is a world of difference between allowing markets to determine the general level of a currency and reacting to short-term speculative pressures. All governments have to react to movements in sterling and this has been particularly true of the past 10 or 15 years when the financial interactions of the Western world have been particularly close. What matters really is the result of these reactions in aggregate over time.

We have reacted to give very strong signals to the money markets that there is no slacking whatsoever by this Government on our counter-inflationary policies or targets. Any remarks which would indicate that there was any slacking on these targets would have an adverse effect.

Lord Shinwell

My Lords, now that the Front Benches have had their say, perhaps we Back-Benchers may be permitted to ask a question or two.

The Statement repeated by the Minister which has been made in another place was very short. It was particularly brief in the context of the euphoria which we have heard for several weeks about cutting down taxes in the next Budget. Regarding the important situation in which the pound had found itself there was nothing to worry about. In fact, the country was on the road to the creation of a new kind of society supported by the noble Earl, Lord Stockton, who tried to give it a bit of a boost. I regret that he is not present. Are we to understand that there is something wrong with the pound? Were we not always told that to retain the value of sterling was of fundamental importance?

I have been reading the press. What we are getting from the press media, if they are truthful—and it has been said that the only truth one gets from the press is the date of publication—is that they have been talking about a financial crisis. What is to happen? Is the country in a terrible mess? What has gone wrong? Is it just a matter of a drop in oil prices? Were we not aware that something of the kind would happen? Have we no strength when the OPEC meets and discusses the price of the oil, be it crude oil or light oil?

The Government should now become a little bit ashamed of themselves. But do not get me in a hurry; we are entitled to express an opinion about our resources. We are concerned about our taxes, we are concerned about our cost of living, and we are concerned about a variety of other matters affecting our livelihoods. And we are concerned about the nation and the various facets of the nation. Now is the time to speak out. We are not going to be content with a number of short Statements as we have had from the Minister. We know the Minister is very capable—perhaps sometimes too capable. Some day when he is too capable, we will discover how clever he is.

Anyway, let us leave him for the moment. The point is that we are not going to be content with Statements of this kind. In fact, this calls for a debate. I have no right to ask for a debate, but my comrades on the Front Bench have much more authority than I possess and I am not wishing to intervene in regard to that authority. They may think that this is an occasion when we should ask for a full-blooded debate; and, by the way, not the kind of debate that we had the other day on the economic situation when I had to listen for four or five hours to a succession of the platitudes that I have heard for the last 20 years in your Lordships' House. The television experiment was all right. But what a collection of speeches! I was horrified when I listened to them. I could speak them all, by heart, almost every one from both sides of the House. I have heard them so often. There was not a fresh idea. Nobody had one.

The noble Earl, Lord Stockton, tried to introduce one; but his also is beginning to fade a bit. And who discovered that? The press have discovered it. A few weeks ago he was a star performer. Look at the papers now! Look at the Daily Telegraph—the Telegraph, of all papers which, as everyone knows, is a Tory propaganda sheet.

My Lords, something has got to be done and the way to deal with the situation is to have a debate on the financial position of our country at the present time and on what is the remedy. Is there a remedy? If there is one, tell us what it is. If there is not a remedy, we have got to put up with it.

The Earl of Gowrie

My Lords, as to the brevity of my right honourable friend's Statement, I can do no more in this House than repeat what he said. But it is only fair to my right honourable friend to say that he gave a very detailed, publicly broadcast statement yesterday precisely on these issues. My right honourable friend's stern counter-inflationary policy applies to rhetoric as well as to money.

On the question that the noble Lord, Lord Shinwell, put to me directly—I am glad that he is lending his great weight and influence to pressures to reduce taxation; and I heartily agree with him there—as to whether the country was in a crisis over this issue, we certainly believe that anxieties over sterling have been enormously overdone, as has been the emphasis on potential oil price developments. To read some market comment, one would think that this country was a one-commodity economy; whereas the fact of the matter—which the whole world, not least the intelligent men who run the money markets can see—is that oil accounts for only 5 per cent. of our national output and 8½ per cent. of tax revenues. So that even if one got to the wholly surreal position of a zero value on this important commodity, the territory affected would be only 5 per cent. and 8½ per cent. respectively.

It is understandable as part of our tradition that the Opposition would "have a go" on the devaluation of sterling and the measures that the Government have had to take to react to it, as have all governments. But I do not think that even the sternest critics of the present Government are hurling the same kinds of criticism against the Swiss or the West Germans, let alone the French. But, in fact, since this Government came into office, the Swiss franc has fallen 35 per cent. against the dollar, the deutschmark has fallen by 40 per cent. and sterling by 46 per cent. So that the European economies are all agreed that part of the difficulty is what seems to us to be a gross overvaluation by markets of the dollar. The fact that the world's reserve currency is now the major trading currency in the world gives difficulties for other currencies as well as our own.

We have been much more sharply anxious about whether the world markets—perhaps as a result of listening to some debates in your Lordships' House and elsewhere—might be suspicious as to whether the Government would be relaxing their counter-inflationary targets; and we have taken these measures to give a very sharp reply to those suggestions.

Lord Bruce-Gardyne

My Lords, in the light of the question of the noble Lord, Lord Stoddart of Swindon, can my noble friend tell us which national institutions have gone "into convulsions" since mid-day yesterday? And is it not the fact that the underlying situation today, with very low external borrowings and a much lower rate of inflation, is fundamentally different from previous so-called sterling crises of the past; and that, in view of the Government's assurance that they are determined to persevere with the elimination of inflation, there is very good reason to expect that sterling will re-establish its status fairly rapidly?

The Earl of Gowrie

My Lords, I am grateful to my noble friend for giving me the chance to remind the House that the noble Lord, Lord Stoddart, supported the last Labour Government, who went bankrupt and had to go cap in hand to the IMF. By contrast, as my noble friend has reminded us, we have paid off huge tranches of accumulated debt, brought down inflation substantially, and have seen sustained growth for four years in a row. The present response is proof that we are continuing to keep up the counter-inflationary pressure without which, over time, that sustained growth would be threatened.

Lord Dean of Beswick

My Lords, bearing in mind that one of the major areas of conflict at this point in time is that between Her Majesty's Government and the local authorities, with the shameful rate-capping legislation, may I ask the noble Earl the Minister what effect the dramatic increases in borrowing rates referred to in his last two announcements will have on the amount that local authorities have to repay on their loan debt charges? I have in mind that, as I understand it, today's announcement will mean that in order to cope with the situation the City of Birmingham, for instance, may well have to find a sum of £20 million, without any extra spending; and that Leeds may have to find about £14 million to £15 million, without extra spending. Can the noble Earl give an undertaking that, if that is the case, it will be taken into account in the rate-capping process?

The Earl of Gowrie

My Lords, I must say that after what seems to me like year after year of repetition of simple truths it seems quite extraordinary that the noble Lord could assume that local authorities could behave as if they occupied a different economy from the national economy, particularly in view of the fact that more than 50 per cent. of local authority money is supplied by central taxpayers. Just as the Government have to react to events which they do not welcome and which they think are over-estimated in intensity externally, so, I am afraid, there is no way that one can protect local authorities from the same consequences. But I am sure that if we all keep our heads and our nerves and keep our counter-inflationary policies—policies which Governments of both parties have laid emphasis upon when they have been in office—there is no reason over the longer term why these immediate movements in the money market should be too disruptive.

Lord Dean of Beswick

My Lords—

The Earl of Gowrie

My Lords, I do consider that I answered it in terms. I said that we could not insulate local authorities from other factors operating in the national economy.

Viscount Eccles

My Lords, having lived for the best part of the last three months in or around New York, I should like to ask my noble friend whether he is aware how they look at sterling from that end. First of all, they say that the dollar has risen against all currencies but a little more against sterling than against the other major currencies. When they ask why that is it always comes down to the miners' strike. They are not interested in interest rates; they are not very much interested in petrol prices; but what they are interested in is that we should settle the miners' strike so that the responsibility for the industry is returned to the National Coal Board. If my noble friend can assure us that that is coming fairly soon, he will see a big change in the sterling rate.

The Earl of Gowrie

My Lords, I congratulate my noble friend on his return from honeymoon in New York and I hope that that honeymoon was not bedevilled by too much economic debate. It is indeed the case that the world outside is watching our country carefully in respect of our sorting out our internal affairs. As my noble friend is well aware, whether it is on counter-inflationary issues or on issues of who manages great nationalised industries, the Government have made their position clear and are keeping the pressure up. I am glad to say that in this respect they seem to be going in the right direction.

Lord Ross of Marnock

My Lords, as I understood the Statement, it consisted purely of what the banks have done in reacting to a situation. We have not heard a word of what the Government have done or of what they are going to do in this situation or in respect of the consequences to industry. There is a complacency being shown that is really frightening.

The Earl of Gowrie

My Lords, I would say to the noble Lord, Lord Ross, that in my respectful judgment it would be extremely complacent if the Government behaved as if there were no consequences to the national economy of these speculative movements in the money markets. That is why, as I said earlier, all Governments have to react to them, and we have done so. We are confident that the underlying situation is sound and that therefore our reaction will have the right results.

Lord Stallard

My Lords, may I say to the noble Earl that his replies this afternoon will be of little comfort to the millions of unemployed out there who are worried about the possibility even in the remote future of finding work? They will be of little comfort to the thousands of millions of home owners who are very concerned about the effects on their mortgages or to those people who are genuinely concerned, as was the noble Viscount who has just come back from America, about the Government's inability to settle the miners' dispute.

May I remind him of what was said by my noble friend who spoke from these Front Benches and by the noble Lord who spoke from the Alliance Benches on the question of manufacturing industry? He will recall that in the debate last week a number of Members made the point about the decimation and destruction of our manufacturing industry. Is not what we are witnessing now a direct reflection of that Government policy—the decimation of manufacturing industry and the impression, rightly or wrongly, given abroad throughout the world that we are now simply a one-commodity economy—oil—and no more? That is not destined to bring investment into our industry. Will the noble Earl answer those points rather than try to make petty party points?

The Earl of Gowrie

My Lords, I am not aware of having made any points which would have been resoundingly endorsed by Central Office, but the miners are settling the miners' dispute and, since it is their industry, surely that is the right way forward.

As to the view that Britain is a one—commodity economy, as I have said, the facts of the matter wholly disprove this and the Government do not behave as if it were. I am confident, however, that our reactions to short—term and erratic speculative pressure have been the right ones and I hope that, in the interests of the whole country, for which the noble Lord himself was appealing, and not least because of the concern that we all feel about unemployed people and their prospect of jobs, we shall leave it at that.

Lord Diamond

My Lords, why does the noble Earl keep on referring to short—term speculative pressures, when the pound has been coming down, if one looks at the graph, almost in a straight line from the time when it was at $2.40 to the time today when it is $1.11? How on earth can the noble Earl reconcile that with the true situation? How on earth can he reconcile the facts with what his noble friend Lord Eccles has just said about the miners' strike? Of course the miners' strike has done enormous damage to the economy of this country, but why should sterling suddenly shoot downwards—not even fall, but shoot downwards—when the miners' strike looks like being settled? Why does he take comfort from the noble Lord, Lord Bruce—Gardyne, who suggests to him that it is purely temporary and that the pound is likely to go up? Does he recollect that another noble Lord—I am grateful for his attention—asked him a similar question only a short time ago, with the same result, and the net result has been that the pound has gone down since then? When will the Government take their responsibilities in this field seriously?

The Earl of Gowrie

The noble Lord, Lord Diamond, has asked me a serious question and I will give him a serious answer. The fact of the matter is that I remember many people, not least supporters of the noble Lord, Lord Diamond, and many supporters of the Government, complaining fiercely at the way money markets—erratically, as it turned out, and those were the words I used—over-valued the pound when it was standing at $2.40. It is very difficult to establish what precisely the right rate is. There are some factors in the money markets' movements against sterling which are wholly outside the Government's control. Some, like our own counter-inflationary policy and interest rate policy, are within our control and we have reacted accordingly.

Lord Stoddart of Swindon

My Lords, the noble Earl castigated my noble friend Lord Dean of Beswick for not understanding simple truths. I thought that that was rather unkind. Is it not one of the simple truths at the moment that real interest rates, after yesterday's rise, are the highest they have been in the United Kingdom for 150 years? Is not that a simple truth that really ought to worry the Government?

Is he aware that we perfectly well understand the short-term difficulties that he describes, but I would ask: how short is "short-term"? If he has a term in mind can he tell us when interest rates are likely to drop? That, I am sure, is a question that many industrialists, including Sir Terence Beckett, and certainly many local authorities and house owners will be asking.

The Chancellor, as I am sure the noble Earl would agree, did not give answers to these vital questions in his evidence to the Select Committee yesterday. Indeed, would the noble Earl not agree that the Chancellor's performance was hesitant and that he had no idea where this country was going? Is it not a real and proper condemnation of this Government to say that they simply do not have any proper objectives in view and they are allowing the economy to run them instead of themselves running the economy, in spite of the fact that over the last five years, unlike the last Labour Government, referred to by the noble Lord, Lord Bruce-Gardyne, this Government have had $13,000 million a year of extra revenue from the North Sea—something that in fact they have not taken proper advantage of and indeed have dissipated in a virtual economic rake's progress?

The Earl of Gowrie

My Lords, that statement is untrue on so many points that it is very difficult to answer it in a question and answer session. But may I say that the Government have never hesitated to make their policy wholly clear. It is sustained growth with low inflation. That, as I pointed out to your Lordships in a recent debate, has in fact been achieved by the Government over a period of four years. It is not sufficient to rest policy on that central objective, but it is quite impossible to achieve other objectives without holding to that central objective: and Government after Government in this country, regardless of their political disposition, have learned that the hard way.

As for the question of historical rates of interest, of course these are far too high, and I made it clear in my earlier remarks that we believe the anxieties about sterling which have generated these very high rates of interest are greatly overdone. I would point out to the noble Lord. Lord Stoddart of Swindon, that, in fact, in recent months and over the last two years interest rates in America have been at an historical high as well. We are living in a very different world from the world that we all grew up in—a world in which there are very large sums of money moving electronically and short-term around the money markets of the world. We have to react to this but we cannot be conditioned by it, and in our central policies we are not being conditioned by this.

Lord Mackie of Benshie

My Lords, is the noble Earl aware that the German deutschmark has been performing relatively better in the rise of the dollar and yet their interest rates are way below ours? Is this not significant, and should the Government not be considering what the West Germans are doing which we are not doing, when they manage to hold interest rates down to a reasonable figure for their industry?

The Earl of Gowrie

My Lords, I agree with a great deal of that. The Germans have been running a lower rate of inflation than we have, and that is one of the reasons why we give such emphasis to this policy. Nevertheless, while acknowledging admiringly that truism about the German economy, I would point out to the noble Lord and the House that the deutschmark—even the mighty deutschmark!—has devalued by 40 per cent. against the dollar since 1979. Our figure is 46 per cent. So the difference is not too great.

Viscount Caldecote

My Lords, will my noble friend not agree that one of the factors putting pressure on the sterling exchange rate is the fact that pay increases in industry are running ahead of increases in productivity, and that one of the greatest contributions that noble Lords opposite could make would be to encourage their trade union friends not to ask for pay rises above increases in productivity, so restoring greater confidence in industry and making it more competitive?

The Earl of Gowrie

My Lords, I am grateful to my noble friend. It is indeed the case that a factor in the lower German inflation rate has been a lower level of pay increases overall. I would also point out, particularly in respect of the remarks made by the noble Lord, Lord Dean of Beswick, that American real wages over the last three or four years have been falling, or have kept level-pegging, and that this is a major factor in their better performance on unemployment than our own.

Lord Diamond

My Lords, owing to the total inadequacy of the noble Earl's right honourable friend's Statement and to the inadequacy of the noble Earl's replies, and, indeed, to the inappropriateness of this kind of exchange for dealing with this most serious situation, we shall certainly be pressing through the usual channels for a full debate in the Government's time.

The Earl of Gowrie

My Lords, that is the noble Lord's right, and I shall be delighted to engage in debate with him if the House wishes me to do so. But the fact of the matter is that after spelling out what seems to me to be fairly widely agreed (indeed, they might be criticised for being simplistic) facts of life about the modern international economy, I do not accept the criticisms that he has made.