Base Rates: Cost to Industry (Hansard, 14 March 1989)

§ Lord Strathclyde
My Lords, the cost to industrial and commercial companies to date of the changes in bank base rates since March 1988, compared with the cost if bank base rates had remained the same since March 1988, is estimated to be about £0.8 billion.

§ Lord Dormand of Easington
My Lords, does the Minister recall the euphoria that occurred exactly one year ago today when the Chancellor of the Exchequer introduced a Budget that was supposed to herald a new era in sustained and sound growth? Does he agree that the worst feature of that Budget has been to expose the weakness of the supply side of British industry? In those circumstances, does he agree with the CBI that the nine increases from 7.5 per cent. to 13 per cent. have caused, and are causing, serious under-investment in British industry?

§ Lord Strathclyde
My Lords, we have continued to see sustained growth in the past 12 months. The noble Lord says that interest rates have increased from 7.5 per cent. to 13 per cent. That is of course true from June. But if the base date is taken from March, the figure was at that time 9 per cent. I do not agree with the noble Lord's conclusions. The recent CBI and DTI surveys are consistent with strong manufacturing investment growth which we hope will continue.

§ Lord Hatch of Lusby
My Lords, is the noble Lord aware that a year ago today, as my noble friend has pointed out, the Budget forecast a trade deficit of about £4 billion whereas that deficit has in fact risen to over £14 billion for the year? Is that not the cost borne by industry arising from the increased interest rates? Is not that cost also shown in the smaller figure for exports from this country compared with the much larger figure for imports?

§ Lord Strathclyde
My Lords, exports are performing well. We always knew that strong growth in domestic demand would lead to a rise in imports. I must point out that imports of non-consumer goods have also risen, reflecting a rise in output and investment. So long as the Government maintain a firm fiscal and monetary policy we do not believe that there is a great problem.

§ Lord Peston
My Lords, will the noble Lord explain to the House the point of raising interest rates? Is it to dampen down demand and economic activity? If so, why does he tell us that demand and economic activity have not been dampened down? May we have some enlightenment on that point?

§ Lord Strathclyde
My Lords, the aim of interest rate policy has always been to keep down inflation. Perhaps I may point out that a one percentage point increase in interest rates, even if sustained for a full year, costs companies far less than a one percentage point increase in pay settlements.

§ Lord Hailsham of Saint Marylebone
My Lords, would it not be far more realistic if one mentioned in that context the enormous budgetry deficit of the United States of America and its method of financing it; namely, by raising interest rates and sucking in money from the rest of the world?

§ Lord Strathclyde
My Lords, I broadly agree with the noble and learned Lord's comments.

§ Lord Peston
My Lords, will the noble Lord explain why he broadly agrees with his noble and learned friend when interest rates in the United States are distinctly lower than they are in this country? We should be very happy to have interest rates as low as those of the United States, as would the CBI. Perhaps the noble Lord will also enlighten us on that matter.

§ Lord Strathclyde
My Lords, obviously matters are entirely different in the United States. This Government's policy has been to seek to keep inflation as low as possible by the mechanism of interest rates.

§ Lord Hatch of Lusby
My Lords, is the noble Lord seriously asking the House to believe that the Government do not think that a £14 billion trade deficit over the year is something to worry about?

§ Lord Strathclyde
My Lords, of course it is something to worry about, but, as I said, exports are performing well and we believe that, so long as the Government maintain a firm fiscal and monetary policy, the problem is not as great as the noble Lord suggests.

The Earl of Halsbury
My Lords, does the noble Lord agree that the world's economy is an enormously complex, self-interacting network of practices and that it is over-simplistic to try to isolate one or two of them, in a cause-relation effect?

§ Lord Strathclyde
My Lords, I think that the noble Earl's comments are absolutely correct.

§ Lord Carter
My Lords, if the increase in interest rates is designed to reduce inflation, will the noble Lord indicate the level of interest rates that will produce the Government's target of zero inflation?

§ Lord Strathclyde
My Lords, as I believe the noble Lord well knows, we never speculate on future interest rate movements.

Lord Paget of Northampton
My Lords, so far as one can see a policy here, whenever anything seems to be doing well the Government appear to want to stop it. When at last unemployment begins to drop, they shove up interest rates to stop it dropping. When we have a lovely summer, they discover a hole in the atmosphere and say that they must stop that too.

§ Lord Strathclyde
My Lords, I shall not comment on the latter part of the noble Lord's question. As to the first part, unemployment is of course continuing to fall.

§ Lord Dormand of Easington
My Lords, will the Minister confirm that the express purpose of the present high interest rates is to dampen down domestic demand? That being so, what has he to say about the report—at least according to The Times today—that retail sales are continuing to increase? Will he say to what extent interest rates will be used in order to achieve that objective?

§ Lord Strathclyde
My Lords, the interest rate is used to keep down inflation. The February retail figures are only one month's figures. In the three months to February, retail sales were unchanged from the previous three months.