Interest Rates (Hansard, 14 July 1992)

The Earl of Caithness
My Lords, the Government will continue to set interest rates so as to keep sterling within its ERM bands and to bear down on inflation.

§ Lord Jay
But, my Lords, as the Government's action two years ago in fixing the sterling exchange rate at an uneconomic level has had the predictable and indeed predicted result of ever-deepening depression, rising unemployment, a balance of payments deficit, penal interest rates and a paralysed construction and housing industry, have the Government yet learned any lessons?

The Earl of Caithness
My Lords, the noble Lord is entitled to his opinion. The fact of the matter is that since we joined the ERM the trade deficit with the European Community has fallen from £11 billion in 1990 to just £2 billion in 1991.

§ Lord Harmar-Nicholls
My Lords, yes, but is my noble friend aware that while all reasonable people would expect the Government to decide themselves where their influence should be brought to bear on what the rate of interest should be, in the meantime medium and small businesses are finding the present rate almost intolerable? Is he further aware that it could well be that those businesses will be pushed into a position whereby they will not be around to make their vital contribution when the turn round comes and we want to start expanding again?

The Earl of Caithness
My Lords, I am sure that everybody understands, and particularly every business, that inflation has been a key to many of this country's problems. A resurgence of inflation would be far more damaging to investment than high interest rates.

§ Lord Desai
My Lords, is it not the fact that having decided to stick to the ERM the Government are being rather timid about cutting interest rates? Therefore, does the Minister agree that the Government have failed once again to seize the opportunity which they had in the three months after the election?

The Earl of Caithness
My Lords, no, I do not believe that the noble Lord is right. I believe that the Answer that I gave at the beginning is the right way to tackle our problems. I shall be enlarging on that in the debate which is to follow.

§ Lord Hailsham of Saint Marylebone
My Lords, would my noble friend gently remind his critics that, 98 nice as it would be to believe the contrary, it is not possible to kick-start one's own car with one's own flat battery? Similarly, does my noble friend agree that it is not possible to pull oneself up by one's own boot straps?

The Earl of Caithness
My Lords, my noble and learned friend is right in that the highly international climate in which we trade and do business means that account has to be taken of other countries.

§ Lord Stoddart of Swindon
My Lords, as regards the Government's present policy, can the noble Earl say for how much longer we have to wait and what more we have to stand before the policy works? Can he say what level of unemployment the Chancellor of the Exchequer is prepared to tolerate before he reduces interest rates and gets some demand into the economy? If he does not do that, is the Minister aware and does he agree that we will be in a slump of 1929 proportions?

The Earl of Caithness
My Lords, the biggest threat to employment in this country is inflation. That has been the problem in the past. This is instructive for the noble Lord: since France last realigned in 1987, prices have risen there by less than 18 per cent. In Germany the figure is not far off 15 per cent. In the same period in this country prices have risen by nearly 40 per cent. That is the biggest threat to employment.

§ Lord Boardman
My Lords, does my noble friend agree that if sterling were to he devalued a higher charge would be demanded in interest by those who are expected to hold it?

The Earl of Caithness
My Lords, my noble friend is absolutely right. It is a point which those who criticise what we are doing often fail to take into account.

§ Lord Ezra
My Lords, if it is not possible to reduce interest rates substantially in the near future for external reasons, can the Minister say whether the Government will be contemplating other measures by which the economy can be stimulated?

The Earl of Caithness
My Lords, we shall be shortly discussing the remainder of my right honourable friend the Chancellor of the Exchequer's Budget proposals which will do a great deal for the economy.

§ Lord Marlesford
My Lords, while congratulating the Government on reducing the rate of inflation to 3.9 per cent., does my noble friend agree that our steadfast membership of the ERM is a necessary external discipline? Does he further agree that the Government are at a stage in the political cycle at which is particularly good to resist the siren voices which urge reductions in interest rates, which might well lead to a short-term recovery, but which would then rekindle the flames of the inflationary psychology which has been the curse of Britain for 25 years?

The Earl of Caithness
My Lords, my noble friend is absolutely right. It is extremely important that we keep the pressure on inflation. It would be totally 99 inappropriate to accept that inflation of 4 per cent. or 3.9 per cent. is adequate in this country when everybody else in Europe and, indeed, in the rest of the world is saying that it is far too high.

§ Lord Peston
My Lords, this is an extremely interesting macrocosm of the debate that we are about to have which I shall refrain from taking part in for the moment. However, I hope that the noble and learned Lord, Lord Hailsham, stays to hear me speak about kick-starting the economy because I shall deal with that point. Will the noble Earl clarify his answer to my noble friend Lord Jay? He said that we keep interest rates where they are in order to keep sterling within the bounds of the exchange rate mechanism. Do we take that to mean that if we were to lower interest rates the Government's view is that sterling would simply collapse?

The Earl of Caithness
My Lords, from what the noble Lord said I was not sure whether he was not going to take part in the debate that follows having listened to it at this stage or whether he was not going to take part in the Question. What I said was that the Government will continue to set interest rates so as to keep sterling within its ERM bands.

§ Lord Peston
My Lords, just to clarify his answer, does not the noble Earl agree that he must be saying that, were we to cut interests rates according to the so-called siren voices, sterling would collapse? That is the state of the British economy at the present time, is it not?

The Earl of Caithness
My Lords, if we were to cut interest rates we would be cutting them below German levels and it would therefore be expected that the pound would have to appreciate.

§ Lord Williams of Elvel
My Lords, did the noble Earl say,"appreciate" or "depreciate"?

The Earl of Caithness
My Lords,"appreciate".