Interest Rates (Hansard, 20 January 1994)

§ Lord Henley
My Lords, interest rates will continue to be set so as to meet the Government's objectives for low inflation and sustainable economic growth.

§ Lord Jay
My Lords, since the modest recovery that we have had so far was mainly due to the previous fall in the sterling exchange rate, which has now been substantially reversed, and since heavily increased taxes are due to be imposed on consumers in the coming spring, is there not a real risk of a further downturn in the economy later this year unless some new stimulus is given very soon?

§ Lord Henley
My Lords, as my right honourable friend the Chancellor of the Exchequer made very clear this morning, tax increases are necessary to make sure that the recovery is sustainable. We cannot go on borrowing at the rate at which we have been borrowing. That would be an even bigger threat to the recovery. As my right honourable friend the Chancellor of the Exchequer made clear in the Budget: my decisions on interest rates will be based on a careful assessment of monetary conditions and inflationary trends, focusing particularly upon the growth of narrow and broad money, changes in the exchange rate and movements in asset prices".—[Official Report, Commons, 30/11/93; col. 920.] My right honourable friend will continue to bear all those points in mind and will keep the matter under constant consideration.

§ Lord Ezra
My Lords, are the Government concerned about the recently published report of the chambers of commerce which states that in their opinion the recovery is faltering? As the impact of the further taxes to which the noble Lord, Lord Jay, referred comes into effect, is it not virtually certain that there will be some downturn compared with the previous expectations? If the Government will not use the interest rate mechanism, what other measures do they have for stimulating the economy?

§ Lord Henley
My Lords, I am slightly surprised by the rather gloomy reception that the British Chamber of Commerce gave to their own survey. After all, it shows that business confidence on turnover is at its highest level since early 1989. It further shows significant rises in export deliveries, orders and balances for manufacturing firms in the fourth quarter of 1993. It also shows that every region is reporting growth in sales and orders in both the manufacturing and service sectors. I also notice that the BCC did not ask for a reduction in interest rates; nor did the noble Lord's right honourable friend.

§ Lord Tugendhat
My Lords, does my noble friend agree that the timing of any change in interest rates at this stage ought to be left to the Governor of the Bank of England? Will he bear in mind what the Chancellor of the Exchequer said on the occasion of the last change in interest rates? Will he further agree that this is a matter that should be approached with some caution at the present time? Taking all the survey evidence into account, the recovery appears to be continuing to make progress. Until we know a little more about what the effects of the tax increases will be on the recovery, it might be better to be a little cautious.

§ Lord Henley
My Lords, my noble friend is absolutely right to stress caution, and I would not be prepared to speculate on any future movement. My right honourable friend made quite clear what factors he would take into account in making his decision. As regards timing, my right honourable friend made it quite clear that the precise details of timing would be left to the Bank of England.

§ Lord Stoddart of Swindon
My Lords, can we be sure that at the present time the Chancellor has no secret agenda for shadowing the deutschmark and has in mind a particular parity rate for the pound? Does the Minister agree that that would be quite a disastrous course to follow, as the noble Lord, Lord Lawson, found when he was Chancellor of the Exchequer? He did exactly the same and brought about the recession, which hopefully we are slowly climbing out of.

§ Lord Henley
My Lords, I can assure the noble Lord that my right honourable friend has no secret agenda. I can further assure him that there is now much greater openness in these matters. We now publish a monthly monetary report containing key data on monetary conditions and detailed explanations of interest rate changes.

§ Lord Boardman
My Lords, would my noble friend confirm that responsibility for any change in the interest rate will remain with the Chancellor of the Exchequer, who has responsibility for overall economic policy, and will not be delegated to the Governor of the Bank of England, who is primarily responsible for monetary policy?

§ Lord Henley
My Lords, as my right honourable friend made quite clear, the responsibility for changes will remain with him. It is only on the precise details of timing where the responsibility will be a matter for the Governor of the Bank of England.

§ Lord Eatwell
My Lords, does the noble Lord agree that, given the savage increases in income taxation which are to be imposed in April, together with increases in value added tax, a cut in interest rates is necessary if there is not to be a significant reduction in the living standards of the British people?

§ Lord Henley
My Lords, I have given precise details of the factors that my right honourable friend will take into account if and when he chooses to make changes in the interest rates. As I said earlier, tax increases are necessary to make sure that the recovery is sustainable over the medium term.

§ Lord Eatwell
My Lords, can the noble Lord say whether the withdrawal of spending power from the economy by tax increases aids the recovery or harms the recovery?

§ Lord Henley
My Lords, all that my right honourable friend said when he spoke on the: radio this morning was that it would check it but the recovery is now strong enough not to be stopped.

§ Lord Whaddon
My Lords, is the noble Lord aware that the continued erosion of manufacturing industry capacity in Britain is deeply worrying and is constantly undermining our ability to cash in on the upturn in Europe when it finally comes? Is he further aware that low interest rates are vital in stimulating fixed investment? Will he ensure that that factor takes a high priority in government thinking?

§ Lord Henley
My Lords, we do have low interest rates but we also forecast a healthy growth of around 2½ per cent. this year, which will be the fastest of all the major European economies. That is after taking into account any tax increases.

§ Lord Jay
My Lords, is the Minister aware that I was not suggesting that we should increase our borrowing, but that we should reduce the cost of borrowing in the interests of the Treasury as well as many others?

§ Lord Henley
My Lords, I note what the noble Lord says. If noble Lords want to spend more money, they will obviously have to increase taxation and borrowing yet further.