§ 2.49 p.m.
§ Lord Molloy asked Her Majesty's Government:
§ When they propose to allow the sterling exchange rate to be determined by market forces.
The Paymaster General (The Earl of Caithness)My Lords, the Government favour a strong exchange rate, although there will inevitably be short-term market fluctuations.
§ Lord MolloyMy Lords, I thank the noble Earl for that Answer. However, can he say whether the Government will continue with the policy of high interest rates and Bank of England intervention to buck the market; or will they float the pound in order to join the exchange rate mechanism? Can we have a definition as to which of those policies they intend to adopt?
The Earl of CaithnessMy Lords, there are more answers to the noble Lord's Question than one might presume at first instance. The exchange rate is a factor that we take into account but there are many others. We would all like to see interest rates come down. I know that the noble Lord will agree with me that inflation is the most important factor to get 6 under control and to keep down. As regards the ERM, the Government have made their position very clear. However, as the noble Lord will know, a great deal of our trade is with countries which do not belong to the European Community or the ERM.
§ Lord Jenkins of HillheadMy Lords, under Mr. Lawson, the Government were forced to abandon shadowing the deutschmark. While they hover on the brink of the exchange rate mechanism, now into its 12th year, can the noble Earl say whether the Government have an exchange rate policy? If so, will he tell us what it is?
The Earl of CaithnessMy Lords, we have an exchange rate policy. We favour a strong exchange rate policy.
§ Lord BarnettMy Lords, if the Government have an exchange rate policy, would they care to tell us whether interest rates are being kept high because of market forces, because of the need to bring down inflation or because of the need to defend the pound?
The Earl of CaithnessMy Lords, as the noble Lord will know from his great experience in these matters, interest rates are high in order to bring down inflation. We have therefore a tight monetary policy as well as a fiscal policy.
§ Lord Jenkins of HillheadMy Lords, I am sorry to intervene again. However, in view of what the noble Earl has said, is it because the Government favour a strong exchange rate policy that the pound has weakened by about 10 per cent. in the past few months?
The Earl of CaithnessMy Lords, what does the noble Lord mean by "few"? Since the beginning of the year the pound has remained remarkably stable.
§ Lord MarshMy Lords, does the noble Earl not agree that, as both parties have discovered when in government, ultimately all exchange rates are determined by the market?
The Earl of CaithnessMy Lords, we do want a strong exchange rate. That has been made clear by my right honourable friend the Chancellor of the Exchequer. This affects the domestic money situation.
§ Lord Stoddart of SwindonMy Lords, is the noble Earl aware that joining the ERM is not a panacea for all our economic ills? Nor will it necessarily affect the value of the pound abroad. Is the Minister further aware, and does he agree, that France, which is within the ERM, has an unemployment rate of 9.5 per cent. whereas in this country the rate is 5.8 per cent.?
The Earl of CaithnessMy Lords, I am on exactly the same ground as the noble Lord, Lord Stoddart of Swindon. We have made it abundantly clear that joining the ERM is not a panacea. We have made clear the terms on which we will join. But it is worth noting, as the noble Lord has said, that some 7 countries outside the ERM have a much lower unemployment rate and have reduced inflation much more quickly.
Lord Bruce of DoningtonMy Lords, will the noble Earl accept on behalf of everyone in the House sincere regrets at the untimely death of his noble friend Lord Bruce-Gardyne? During the past 18 months he showed exemplary courage in the face of adversity. He will be missed not only by his own party, but by the whole House.
As regards the various answers which the noble Earl has given, can he explain how it is in the interests of industry that the pound sterling should be artifically maintained at a higher rate than its real competitive rate in the world? Does the Minister really think that maintaining a strong pound—so beloved of the City which does very well out of it —is in the ultimate interest of the exporters of goods from this country and also of the balance of payments?
The Earl of CaithnessMy Lords, I am very grateful for what the noble Lord said about my noble friend Lord Bruce-Gardyne. I am sure that all the House will want to be associated with his remarks.
As regards the noble Lord's question, a lower pound tends to lead to higher import prices in sterling terms thus giving domestic producers more headroom to pass on increases: a higher pound has the opposite effect. We prefer a strong pound for all the reasons I have given.
§ Lord MolloyMy Lords, is the noble Earl not aware that a continued policy of high interest rates punishes very savagely millions of British people who are trying to buy their own homes including those who were encouraged to buy their council houses but who are now having to leave them because they cannot pay the high mortgages? In view of these factors, together with the harm that is being done to British industry, does the Minister not agree that it is about time that the Government reviewed a policy which continues to harass home purchasers and certain parts of the British industry?
The Eari of CaithnessMy Lords, that is a separate question. I believe that the noble Lord will agree with me that it is very important that we get inflation down and have it firmly under control again. Inflation will be more damaging to pensioners' saving, as in the 1970s, besides affecting young people who are trying to buy their own homes, than temporary high interest rates. Of course we would like to reduce interest rates as soon as possible; but we must first reduce inflation.
§ Lord EzraMy Lords, as the Government are committed to joining the exchange rate mechanism in due course, can the noble Earl indicate whether they have formed a view about joining this year, next year or at some later date?
The Earl of CaithnessMy Lords, it is very difficult to prejudge when exactly the time will be right to join because conditions have to be right at that time.
8 The conditions are not right at the moment, but when they are, we shall join.
The Earl of HalsburyMy Lords, is the choice between a strong and a weak pound any different from the choice between shooting oneself in the left rather than the right foot?