HL Deb 11 November 1996 vol 575 cc784-6

2.40 p.m.

Lord Spens asked Her Majesty's Government:

Whether the recent rise in the relative value of sterling was foreseen and whether there are any consequences for their future monetary and fiscal policies from a continued and sustained increase in the value of sterling.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)

My Lords, exchange rates are volatile and notoriously difficult to predict. If the rise in sterling is sustained, it could have a temporary effect on domestic inflation. The exchange rate is only one of many factors that has to be taken into account. Monetary policy is, and will continue to be, aimed at achieving the Government's inflation target of 2.5 per cent. or less. The Government recognise the value of a stable exchange rate but do not have a target for sterling.

Lord Spens

My Lords, I thank the Minister for his answer. Is the Minister aware that twice in the life of the present administration sterling exchange rates have been at a historical high, particularly in relation to the dollar, and that afterwards there has been a period of recession? Are we heading again into those depths, or will this country do something to prevent exchange rates from going even higher?

Lord Mackay of Ardbrecknish

My Lords, I believe that I answered the original Question put by the noble Lord when I said that, although the Government recognised the value of a stable exchange rate, they did not have a target for sterling. Before the noble Lord becomes too concerned about the recent increase in the value of sterling—I understand that since the trough in mid-summer it has appreciated by about 8.5 per cent.—he should remember that this takes sterling back to around the level it was towards the end of 1994.

Lord Peston

My Lords, I do not believe that the noble Lord really expressed a view. I certainly did not predict that sterling would strengthen to the extent that it did. I believe that it is right for me to declare a prejudice. I prefer a strong to a weak sterling. There is nothing more disastrous than the continuous decline in the value of sterling which this country has experienced during the lifetime of this Government. I could not resist that one! I also promise not to guide us back to EMU by asking about the fixed value of sterling if we follow that route.

If the rise in sterling is the result of speculative forces, does the Minister agree that that will yet again be deleterious to British industry on a scale far in excess of anything else that might affect Britain's ability to compete abroad? Further, does the Minister agree that a 10 per cent. appreciation, much as I may like it in a way, cannot possibly be of help to industry in the short term?

Lord Mackay of Ardbrecknish

My Lords, I do not have to make predictions either as I am not a professor of economics. But I do not believe that the increase in the value of sterling has been caused by speculation. There are other factors at work. As I said in my main answer, these movements are difficult to predict, as the noble Lord has agreed. The Government, together with the Governor of the Bank of England, simply have to take a view every month of the effects of a number of factors. As far as concerns exports, for many months they have been strong. Only this morning there was an announcement of an export order worth £1 billion from Australia.

Lord Brabazon of Tara

My Lords, does my noble friend recall that two of the countries with the strongest exchange rates over the past 50 years or so, Germany and Japan, have also had the two most successful economies?

Lord Mackay of Ardbrecknish

My Lords, my noble friend makes a telling point. Although exchange rates are not the only factor in the success of an economy, it is true that both Germany and Japan, with strong currencies, have been very successful. That confirms the point made by the noble Lord, Lord Peston, that one should not be tempted by the siren song of those who believe that it becomes easier to live if one devalues one's currency.

Lord Ezra

My Lords, does the Minister agree that the Chancellor of the Exchequer is now in a bit of a trap? He is harkening to the advice of the Governor of the Bank of England that interest rates should be increased in order to limit inflation, but, on the other hand, the more he increases interest rates the more sterling will rise and the more difficult it will become for our exporters?

Lord Mackay of Ardbrecknish

My Lords, I believe that the last person who can be accused of being in a trap is my right honourable friend the Chancellor of the Exchequer. There are a number of different factors in the economy. At their monthly meeting the Governor of the Bank of England and the Chancellor have to take into account all those factors. If one looks for the success of the economy, one has only to consider the way in which unemployment has declined year on year for many years in comparison with our European friends and how the number of people in employment has increased. I believe that if the noble Lord looks at those figures he will be a little more optimistic.

Lord Pearson of Rannoch

My Lords, can my noble friend say why he is so convinced that sterling is not suffering some of the problems of the Swiss franc, into which billions of deutschmarks are being poured because knowledgeable people in Germany and elsewhere have formed the firm opinion that the Euro, if it ever comes into existence, will be a weak currency? If sterling is to stay out of that weak currency, may it not attract similar speculation? If so, does that not underline the immense difficulty of the whole project of European monetary union?

Lord Mackay of Ardbrecknish

My Lords, my noble friend tempts me into discussing European monetary union, which does not greatly surprise me. I thought that I was about to have the exchange that my noble friend Lady Chalker has just had. As I said to the noble Lord, Lord Peston, I do not believe that we are seeing much in the way of speculation. Although I will check later, I do not believe that there is evidence that, like the Swiss, we are getting great inflows of deutschmarks because the Germans are afraid of EMU.