Interest Rates and Inflation (Hansard, 20 March 1990)

§ The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)
My Lords, the contribution of the mortgage interest payments component to the annual rate of increase in the retail prices index in January was 1.9 percentage points.

§ Lord Dormand of Easington
My Lords, does the Minister recall the many occasions on which we have been informed that the main objective of high interest rates is to curb consumer spending? In view of the most recent official figures on this matter, which show that consumer spending continues to rise at a fairly high rate after 18 months of high interest rates, does not the Minister now agree that using only interest rates is an abject failure?

§ Lord Henley
No, my Lords, I do not agree. I accept that the inclusion of the mortgage interest 195 payments in the RPI leads to the perverse result of increased interest rates pushing up the RPI in the short term. However, in the long term a tight monetary policy will bring inflation down.

Lord Bruce of Donington
My Lords, will the noble Lord give the House an indication as to what he means by "long term?" Will he ask his right honourable friend the Chancellor of the Exchequer whether he would be prepared now to amend his slogan, because quite clearly the interest rate is hurting and is not working?

§ Lord Henley
My Lords, it is beginning to work. I shall certainly pass on the noble Lord's comments to my right honourable friend. As my noble friend, Lady Hooper says, that will probably not be this afternoon, because he is busy with other matters.

§ Lord Donoughue
My Lords, is the Minister not aware that the impact of high interest rates goes much wider than mortgages? Is he not aware that the present level of corporate debt, the debt of industry, is at almost its highest historical level? Since the cost of money is a major factor in industrial costs, does he accept that such high interest rates must have an inflationery impact?

§ Lord Henley
My Lords, the original Question was about the effect of interest rates on the RPI. Mortgage interest payments are the only form of interest payments which are included in the RPI.

§ Lord Donoughue
My Lords, does the Minister have a different Question from the one on the Order Paper? That does not mention the RPI; it mentions inflation.

§ Lord Henley
My Lords, the RPI is our measure of inflation.

§ Lord Williams of Elvel
My Lords, can the Minister be more statistically accurate? The RPI is not the necessary measure of the rate of inflation. The Question refers to the present level of interest rates— the generality of interest rates— and how that affects the rate of inflation across the economy. That is the point that my noble friend Lord Donoughue made.

§ Lord Henley
My Lords, our measure of the rate of inflation is the RPI. It is the best measure that we have, and mortgage interest repayment rates are the only form of interest included in the RPI.

§ Lord Stallard
My Lords, the noble Lord said that the interest rate is working. Is he satisfied, therefore, that one of the criteria for that judgment is that thousands of people can no longer afford to live in their houses, which have been repossessed? Is that what he calls "working"?

§ Lord Henley
My Lords, I repeat what I have said on many occasions and what my noble friends and colleagues in another place have said. Interest rates 196 will remain as high as is necessary for as long as is necessary to bring down the rate of inflation.

§ Lord Tordoff
My Lords, is the Minister seriously trying to tell the House that the retail prices index is the only measure of inflation that this Government use?

§ Lord Henley
My Lords, we also consider some uprating of the retail prices index without housing costs. On this occasion I am talking about the retail prices index.

§ Lord Williams of Elvel
My Lords, the noble Lord has admitted that there are other measures of inflation which the Government adopt, such as, the taxes and prices index which a previous Chancellor introduced. Will he now answer the Question as to what effect the present level of interest rates is having on the rate of inflation?

§ Lord Henley
My Lords, I have answered that Question. I said that I was answering in terms of the retail prices index and I shall stick to that Answer.

§ Lord Kinnaird
My Lords, should we perhaps wait for the result of the Budget this afternoon?

Noble Lords
No!

§ Lord Dormand of Easington
My Lords, why are high interest rates not curbing consumer spending?

§ Lord Henley
My Lords, I accept that retail sales growth picked up in the early part of this year. However, retail sales are still much lower than in 1988 and early 1989. Retail sales growth in 1988 reached 8 per cent. compared with a growth rate of 2.25 per cent. in the three months ending in February.

§ Lord Jay
My Lords, why is it that this Government have been fighting inflation for 10 years and more but inflation still seems to be winning?

§ Lord Henley
My Lords, I do not accept that inflation seems to be winning. The all-items inflation rate is lower now than in the middle of 1989. The underlying rate, as measured by the RPI excluding mortgage interest payments, rose by only half a point since the beginning of 1989, and is only marginally above the rate in May 1989.