Exchange Rate: Policy (Hansard, 11 April 1988)

§ The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara)
My Lords, exchange rates play a central role both in 911 domestic monetary decisions and in international policy co-operation. The objective of monetary policy is to exert downward pressure on inflation. The Government will not accommodate increases in domestic costs by exchange rate depreciation. Governments of all the major industrial countries are committed to seeking greater exchange rate stability.

§ Lord Ezra
My Lords, will the noble Lord accept that the reports of recent disagreements in high places on exchange rate policy have caused confusion and unsettlement? Will he tell the House whether those disagreements have been resolved and whether, in the light of the reduction in interest rates last week, it is now the firm objective of government policy to ensure that we have a stable exchange rate at a competitive level in order to enable us to counter the increasing imports coming into this country?

§ Lord Brabazon of Tara
My Lords, I do not accept that there was a disagreement. However, as my right honourable friend the Chancellor made clear in his Budget speech, exchange rates play a central role in domestic monetary decisions as well as in international policy co-operation. Greater exchange rate stability will bring advantages to the economy in general and to industry in particular. However, exchange rate stability does not mean immobility, and adjustments are needed from time to time.

§ Lord Bruce-Gardyne
My Lords, can my noble friend assure the House that, as his noble friend the Secretary of State for Trade and Industry reminded us, the pursuit of a competitive exchange rate can prove to be a will-o'-the-wisp, as happened in the 1960s and 1970s, and that he will continue to give us that wise advice and will not allow himself to be nobbled by the parties opposite, by the Treasury or anyone else?

§ Lord Brabazon of Tara
My Lords, my noble friend is quite right. There are three factors which affect industry. The most important is the containment of inflation.

Lord Bruce of Donington
My Lords, would not a more accurate and fair reply to the Question put by the noble Lord, Lord Ezra, have been that the Government do not have the remotest clue what their exchange policy is? Does the noble Lord agree that the quite idiotic remark made by his right honourable friend the Prime Minister in mid-June 1980, when the dollar stood at 2.40 to the pound and she stated that the pound could at last look the dollar in the face, was one of the statements of government policy which was followed by large-scale unemployment? Will the noble Lord please ask his right honourable friend the Prime Minister, before she follows the noble Lord, Lord Young, in the market forces argument, to have some regard to history in those matters?

§ Lord Brabazon of Tara
My Lords, I certainly do not accept that my original Answer was either inaccurate or unfair. As for the remarks made by my right honourable friend the Prime Minister, I do not believe that she has taken to making idiotic remarks.

§ Lord Molloy
My Lords, is the Minister aware that all the responsible financial newspapers in this country and in other countries completely disagree with his reply to the Question asked by the noble Lord, Lord Ezra? Such goals would be admirable if they were being achieved. The fact is that British industry is suffering, British finance is suffering, and the Continent, if not the world, is talking about schisms in high place in the Government. Because of those schisms and because there is no real policy, the British nation is suffering.

§ Lord Brabazon of Tara
My Lords, I can hardly accept that the British nation is suffering at the moment, with exports holding up extremely well and reserves extremely buoyant. The exchange rate has shown greater stability over the past year. As I said earlier, our primary purpose must be to contain inflation.

§ Lord Boyd-Carpenter
My Lords, is it not a fact that the strength of sterling, which is the matter now causing comment, is a considerable justification of the economic policy pursued by the Government? Does my noble friend recall the contrast of the weakness of sterling when noble Lords opposite were in charge?

§ Lord Brabazon of Tara
My Lords, I do indeed. I am glad to be able to say that that was a long time ago. Of course there are problems when sterling is too strong. However, we do not wish to return to the era of attempting to fix rates.

The Earl of Halsbury
My Lords, what has become of our old power to require the deposit banks to deposit with the Bank of England, thus preventing the economy overheating with reduced interest rates? Surely the two mechanisms could be made to work in parallel in such a way as to promote exports and do the opposite to imports, while promoting the economy.

§ Lord Brabazon of Tara
My Lords, I do not have an answer for the noble Earl's question concerning bank deposits. I shall write to him.

§ Lord Stoddart of Swindon
My Lords, is the noble Lord aware that the theory of free markets only operates when it is allowed to prevail? Will he say by how much the unemployment figure will rise in the next year if the exchange rate is not allowed to react to market forces?

§ Lord Brabazon of Tara
My Lords, I could not possibly give an answer to that question, even if the original Question had been about unemployment, which it was not. However, it would be even more damaging to employment figures to allow inflation to rise.

§ Lord Taylor of Gryfe
My Lords, I am sure that we all welcome the Government's commitment to exchange rate stability. However, in pursuit of that objective, will the Government review their attitude towards joining the European Monetary System, which would achieve that end?

§ Lord Brabazon of Tara
My Lords, we keep the matter of joining the exchange rate mechanism under continual review, as I have said on many occasions in your Lordships' House. However, I do not accept that joining the exchange rate mechanism would necessarily protect us or indeed anyone else from currency fluctuations. The countries within the mechanism are not protected from realignments nor from frequent changes in interest rates.

§ Lord Peston
My Lords, I wonder whether the noble Lord would care to correct one aspect of an answer which he has just given? Is he not aware that the sterling/dollar rate and the sterling/deutschemark rate were considerably higher when the Labour Party was last in power than at the present time, and that sterling is now devalued against both the dollar and the deutschemark compared with 10 years ago?

§ Lord Brabazon of Tara
My Lords, I do not think that I said anything to the contrary.

§ Lord Barnett
My Lords, can the Minister tell us whether the Government consider that the present exchange rate against the deutschemark and the dollar is sustainable? If so, why were interest rates reduced last week?

§ Lord Brabazon of Tara
My Lords, interest rates were reduced last week because we do not wish to see an unsustainable rise in the exchange rate and because overall conditions made the one-half of 1 per cent. interest rate cut appropriate.

§ The Earl of Onslow
My Lords, is my noble friend not aware that one should congratulate the present Government on running a very successful economy, with reducing unemployment, increasing production and increasing general welfare for the population? Does my noble friend agree that the knowledge of history on the Front Bench opposite seems to be inaccurate because the statement about looking the dollar in the face was made either by Chamberlain or by Churchill before the war and not by Mrs. Thatcher in 1980; and that if their knowledge of economic policy is as inaccurate as their knowledge of history it bodes well for the Conservative Party at the next election?

§ Lord Brabazon of Tara
My Lords, my noble friend is correct in many of the points he makes. The British economy has been transformed over the past nine years. Nowhere has this been more marked than in manufacturing industry. Manufacturing exports rose by 8½ per cent. last year alone.