§ Mr. MealeTo ask the Chancellor of the Exchequer what would be the effect of a 1 per cent. change in United Kingdom interest rates and a 1 per cent. change in import prices, respectively, on the retail prices index.
§ Mr. Lilley[holding answer 6 July 1989]: The effect of an increase in interest rates is to encourage saving, reduce spending and thus, over time, to bear down on inflation. However, because of the inclusion of mortgage interest payments in the RPI, a one percentage point increase in all United Kingdom interest rates would initially increase the retail prices index by about 0.4 per cent. No disaggregation is available for the imported component of the goods and services in the retail prices index. Whether, and to what extent, an increase in import prices will affect the RPI depends on the stance of monetary policy. The present Government is not prepared to accommodate inflation.