§ Mr. Gouldasked the Chancellor of the Exchequer what is the likely effect on the retail price index of the increase in MLR to 15 per cent.; and what would be the impact on the RPI if the MLR were reduced to 8 per cent. and this were accompanied by a 10 per cent. devaluation.
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§ Mr. Denzil DaviesIt is not possible to make precise estimates because of uncertainties about the way the economy is likely to respond at any given time to changes in the structure of interest rates. But the major direct impact on the RPI following the two-stage increase in MLR from 11½ per cent. to 15 per cent. is likely to result from the associated increase in building society interest rates. There is, however, no straightforward automatic relationship between MLR and building society rates. Each 1 per cent. increase in mortgage interest rate adds approximately ¼ per cent. to the RPI, and the impact of the recommended increase from 10½ per cent. to 12¼ per cent. is therefore estimated to increase the RPI by a little less than ½ per cent.
Similarly, the main direct impact of a reduction in MLR to 8 per cent. would probably come from any associated reduction in building society rates; a fall of, say, 4 per cent. would reduce the RPI by about 1 per cent. On the other hand, a devaluation of 10 per cent. would, over time, produce an offsetting increase in the RPI of the order of 2½ per cent. There is, however, no basis for any prediction of the impact on the economy as a whole of the simultaneous introduction of the changes suggested, even assuming these could in practice be implemented.