Interest Rates: Government Policy (Hansard, 3 March 1993)

The Minister of State, Department of Transport (The Earl of Caithness)
My Lords, interest rates are set so as to meet the Government's objectives for low inflation and sustained economic growth.

§ Lord Barnett
My Lords, I am obliged to the noble Earl for that Answer. Is he aware that we recognise that the Chancellor must, we assume, perform a difficult balancing act between interest rates, inflation, exchange rates and fiscal policy? It would be better if we did not have to start from here. However, did the noble Earl note that on Monday the Governor of the Bank of England said that even if German interest 658 rates come down we should not follow suit, but rather we may have to increase our interest rates? Does he agree with that?

The Earl of Caithness
My Lords, I disagree with the premise that the noble Lord said that we should not start from here. This is a very good place from which to start, with interest rates the lowest since 1977 and the lowest in the EC.

§ Lord Renton
My Lords, is my noble friend aware that each member of the Community tends to have a different rate of inflation, a different level of unemployment, different capital investment needs, different balance of payments problems and that each member of the Community needs to have its own interest rates? Is that accepted by the Government as a factor of economic life?

The Earl of Caithness
Yes, my Lords, we certainly believe that each country should be able to set its own interest rates. That is what my right honourable friend the Chancellor has done. That is why, in real terms, our average is well below that of the EC and the G7.

§ Lord Richard
My Lords, given the fact that the Government's main weapon against inflation over the past few years has been the use of interest rates and that the use of those high interest rates has wrecked the British economy, has put thousands of people out of business and has ejected many from their homes, are the Government thinking in different terms as to how they might manage the economy when inflation rises again?

The Earl of Caithness
My Lords, inflation rates are fully consistent with a sustained recovery this year, combined with low inflation over the medium term.

§ Lord Hailsham of Saint Marylebone
My Lords, does my noble friend agree that in the interests of preventing undesirable speculation many of us applaud the fact that he is keeping his cards fairly close to his chest in relation to interest rate policy?

The Earl of Caithness
My Lords, I am grateful to my noble and learned friend.

§ Lord Holme of Cheltenham
My Lords, given the inter-relationship between the rate of exchange and interest rates, and given the precipitate fall in the value of the pound against both the deutschmark and the yen since last September, will the Minister tell the House to what levels, if any, the Government regard it unacceptable for the pound to fall before they take action on interest rates?

The Earl of Caithness
My Lords, I believe that that question should have been asked yesterday rather than today.

§ Lord Harmar-Nicholls
My Lords, is my noble friend aware that in regard to the effect on small and medium-sized businesses, it is one matter to reduce interest rates but quite another matter if, at the same time, bank charges—for all sorts of reasons not mentioned previously—claw back the money saved by a reduction, therefore not improving the prospects for business investment?

The Earl of Caithness
My Lords, there have been substantial benefits. The full effect of interest rate cuts since October 1990 are worth over £11 billion per year off industry's interest bill and about £160 per month from payments on an average £33,000 mortgage.

§ Lord Eatwell
My Lords, will the noble Earl tell the House what is the Treasury's estimate of the impact on interest rate policy of the abandonment of the fully funding rule?

The Earl of Caithness
No, my Lords.

§ Lord Ezra
My Lords, in view of the Bank of England's first quarterly report on inflation, which no doubt the noble Earl has read with great care, and its estimate that, on present trends, inflation could rise above the Government's target before the end of next year, is that the point at which the Government would increase interest rates?

The Earl of Caithness
My Lords, as the noble Lord will be aware, we continue to look at a number of indicators. We have a range for the inflation rate and my right honourable friend the Chancellor of the Exchequer will take whatever measures are necessary.

§ Lord Clark of Kempston
My Lords, does my noble friend agree that a reduction in the base rate from 15 per cent. to 6 per cent. is highly desirable? Will he assure the House that the whole of that reduction has been passed on to business?

The Earl of Caithness
My Lords, I agree with my noble friend that that is desirable. I have said that the full effects of interest rate cuts are passed through to businesses and to home owners.

Lord Bruce of Donington
My Lords, following his answer to the noble Lord who has just sat down, and his reply to the noble Lord, Lord Harmar-Nicholls, is the noble Earl aware that although he is correct in assuming that the minimum lending rate has gone down, that is far from the case as regards ordinary small businessmen? Small businessmen are still being charged extortionate rates. The country requires a policy from the Government that ensures that the full benefit of the decline in interest rates is passed on to small businesses.

The Earl of Caithness
My Lords, from all the discussions I have had with small businesses in recent months I know that they are extremely grateful for the reduction in interest rates.

§ Lord Barnett
My Lords, will the noble Earl confirm, when he said he was happy to start from here, that he is happy with the present level of the exchange rate? At the same time, will he answer the original Question on the Order Paper?

The Earl of Caithness
My Lords, as regards the noble Lord's second question, I answered the original Question on the Order Paper in my first Answer. With regard to the noble Lord's first question, we talked about sterling's value yesterday.

§ Lord Stoddart of Swindon
My Lords, if the noble Earl and the Government believe it is right for each 660 country in the Community to set its own interest rate policy, why are the Government forcing the Maastricht Treaty through the House of Commons, and presumably through this House in due course, when economic and monetary union and the formation of a European central bank will remove that right from individual members of the EC?

The Earl of Caithness
My Lords, I congratulate the noble Lord for bringing the Maastricht Treaty back into Question Time. We look forward to discussing it with him in the near future.