§ Mr. Terry Walker
asked the Chancellor of the Exchequer whether he is satisfied with the present methods of calculating Government lending rates.
§ Mr. Denzil Davies
The methods are subject to a continuing process of review and improvement.
As explained in the reply to a Question by my hon. Friend the Member for Farnworth (Mr. Roper) on 3rd May—[Vol. 910, c. 260.]—the Government are under a statutory obligation to ensure that the rates of interest on loans from the National Loans Fund (NLF) are related to the cost of Government borrowing. A yield curve for Government stocks is regularly calculated, and from this the NLF rates are derived. Recent research has led to changes both in the method of calculation of the yield curve and in the derivation of the NLF rates from the curve. Part of that research is described in an article to be published in the Bank of England Bulletin on 17th June. The results will be small changes, mainly increases, not exceeding 1½ per cent. and in some cases falling as low as ⅛ per cent., in the rates applicable to 754W loans to local authorities from the Public Works Loan Board (PWLB) and to public corporations from the NLF and some other Government loans; and the introduction of two different rates for two different kinds of annuity loans—those repayable by equal instalments of principal and those repayable by equal instalments of principal and interest combined—in place of the single rate used at present.
Further research has led to a revision in the PWLB's "non-quota" rates. These rates are intended to be related to the cost to local authorities of borrowing on the market, and the research suggests that the cost is higher than previously estimated. In future, a yield curve will be calculated for local authority stocks, where sufficient stocks exist, and this will be used to determine "non-quota A" rates. These apply to loans where the local authorities give evidence of their inability to raise the money on the market. "Non-quota B" rates, which apply to loans where no such evidence is required, will remain at 1 per cent. above "non-quota A" rates.
The new methods of calculation will be applied for the first time to the rates effective from Saturday 12th June.