Exchange Rate Mechanism (Hansard, 13 February 1991)

§ The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)
My Lords, no.

§ Lord Stoddart of Swindon
My Lords, is the noble Lord aware that that is a most disappointing Answer? Is it not a fact that the promise of sharply reduced interest rates before we joined the ERM has proved wrong? Does the Minister agree that it is a fact that the Government are now in a situation where they cannot cut interest rates by the amount required and are therefore endangering the real economy? Does the Minister further agree, as some distinguished economists remarked in The Times today, that we are in danger of having a 1930s-type slump with mass unemployment?

§ Lord Henley
My Lords, I am sorry that the noble Lord finds my Answer disappointing. He is probably not aware that at 9.47 this morning we announced a reduction in interest rates of a half per cent.

§ Lord Stoddart of Swindon
My Lords, that is too little and too late.

§ Lord Barnett
My Lords, will the Minister tell the House why it is that those countries within the exchange rate mechanism have for so long had a much better economic performance than we have?

§ Lord Henley
My Lords, that is why we went into the exchange rate mechanism—so that we could reap the benefits of that mechanism.

§ Lord Harmar-Nicholls
My Lords, is my noble friend aware that the exchange rate has nothing whatever to do with one's competitiveness in being able to earn the money to have a good exchange rate? Does he now agree that we joined on terms which are not satisfactory to us? Surely we should do something about the situation even if we do not withdraw from the exchange rate mechanism.

§ Lord Henley
My Lords, I do not accept what my noble friend said. There have been allegations that we went in at the wrong time. But as we explained when we went in, we thought that that was the right time to join and that is why we did so. I feel that any change 108 now in the exchange rate—in other words, a realignment—would weaken our credibility. It is very important that we stick to the rate and convince people that we intend to do so.

§ Lord Grimond
My Lords, will the Government have time to study the letter in today's edition of The Times from some very eminent Conservative economists, including a recent adviser to a recent Prime Minister, which deals with this matter and which also stresses the essential need to reduce the interest rate?

§ Lord Henley
My Lords, I have studied that letter. As I said, we had already reduced the interest rate this morning by as much as it was prudent to do so.

§ Lord Jay
My Lords, does the Minister understand that at present the forces of depression have been allowed to grow so strong in this country that a small cut in the bank rate, without a drop in the exchange rate, will not turn the tide?

§ Lord Henley
My Lords, I am sorry that the noble Lord thinks that. The allegation of the risk of a depression must be put into context. The current situation of the 1990 GDP for manufacturing output and employment shows that a number of firms have already reached record levels.

§ Baroness Seear
My Lords, does the Minister agree that we debated all these matters at considerable length yesterday and that it is really a waste of your Lordships' time to do it all again the day after?

§ Lord Henley
My Lords, I certainly agree with the noble Baroness.

Lord Bruce of Donington
My Lords, will the noble Lord give the House an indication that, when the Government made the decision to reduce the minimum lending rate by a half per cent., they had already seen the text of the letter to The Times to which many noble Lords have referred? Can the Minister say why the Government do not accept the sensible situation of applying for a realignment within the existing exchange rate mechanism to a point where the pound might be valued at about 2.60 deutschmarks and about 1.55 to 1.60 dollars so that the economy can be put on an even keel and so that we may compete properly on an even playing field internationally?

§ Lord Henley
My Lords, the cut in the interest rate was not in response to the letter in today's edition of The Times. The cut was a measured response to the current market conditions.

§ Lord Annan
My Lords, does the Minister agree that the question asked by the noble Lord, Lord Jay, has great cogency? Are not the Government making the same mistake as they made four years ago when interest rates were raised by a half per cent., then by a half per cent. and then by a half per cent. with the result that inflation was not stopped? We are doing the same thing again; we are reducing the interest rate by only a half per cent. when we are facing a major recession.

§ Lord Henley
My Lords, I do not accept what the noble Lord, Lord Annan, has said. As I said, we judged it right to make a reduction of a half per cent. We shall make further reductions as and when we are able to do so. Interest rates are set at a level needed to keep sterling within its ERM band and thus to bear down on inflation. We feel that it would be a mistake to cut interest rates to provide a short-term stimulus.

§ Lord Williams of Elvel
My Lords, is the noble Lord aware that after the reduction in the base rate this morning sterling firmed within the ERM, which was contrary to expectations? Will the Government now take the other step and reduce the base rate by another half of one per cent.?

§ Lord Henley
My Lords, as I said, we reduced the rate by a half per cent. and we shall reduce it further as and when we are able to do so.

§ Baroness Phillips
My Lords, does the Minister agree that perhaps the previous Prime Minister, being a woman, was right after all and should not have been sacked?

§ Lord Henley
My Lords, that goes somewhat wide of the Question on the Order Paper.

§ Lord Stoddart of Swindon
My Lords, is the noble Lord aware that the Government show remarkable complacency about this whole business? Do not the Government realise that unless we have an urgent and substantial cut in interest rates the economy will slide into a real slump with high unemployment? Will the Government do something about that?

§ Lord Henley
My Lords, I am sorry that the noble Lord accuses me of complacency. I totally reject what he has said. We shall cut interest rates further when we are able to do so.