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Minimum Lending Rate

Volume 940: debated on Thursday 1 December 1977

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asked the Chancellor of the Exchequer (1) on what occasions during 1977 the Bank of England signalled to the money market that it was opposed to a reduction in the minimum lending rate; what was the minimum lending rate on each occasion; and by how much the reserves rose in each of the months when this happened;(2) whether the advice he received earlier in the current year that a substantial fall in minimum lending rate would prejudice the Government's ability to finance the public sector borrowing requirement has been borne out by events.

It was a major objective of my right hon. Friend's measures last December to create conditions in which interest rates could fall while control was maintained over the monetary aggregates. This has been achieved. MLR is now 7¾ per cent. lower than a year ago and long-term interest rates are over 4 per cent. lower.However, the authorities were concerned at some stages about the speed of the fall in the interest rates, because of possible implications for the control of the monetary aggregates and the importance of consolidating the improvement which had taken place in financial markets. That concern did not just relate to the prospects for the sale of public sector debt.The measures taken by the authorities to influence the course of short-term interest rates at such times included both guidance to the market, usually associated with lending to the market at MLR for a week, and administered changes in MLR. The form and extent of the guidance varied so much from occasion to occasion that a list of those occasions by itself would be misleading.However, the periods of particular concern about the speed of the reduction in interest rates were February and early March, before the Budget and before the future form of pay policy was clear, for a short period from the end of April to early May, and from mid-August to mid-October when the domestic financial markets were affected by the effects of foreign exchange inflows. Full details of MLR and the Treasury Bill rate for these periods are set out in Tables 3.7 and 13.4 of Financial Statistics.The occasions when a change in MLR was determined by administering the rate, rather than determined by the formula linking it to Treasury Bill rate were:

Minimum Lending Rate
DateBefore change Per cent.After change Per cent.
3rd February*12¼12
10th March1211
18th March1110½
31st March10½
29th April*
* The Treasury Bill tenders in the weeks following 3rd February were such that the formula did not re-engage until after the reduction in Minimum Lending Rate on 10th March. Similarly, the formula did not re-engage until 13th May following the administered change on 29th April.
The monthly change in the official foreign exchange reserves this year has been as follows:

Reserves Change $ million
January+ 3,067

asked the Chancellor of the Exchequer (1) why the MLR was raised by 2 per cent.;(2) who decided that the MLR should rise by 2 per cent.

External inflows, before the change in exchange market tactics at the end of October, had carried short-term interest rates down to lower levels than would have been the case if there had only been domestic market pressures. An upward adjustment then took place in the short-dated gilts market and the long end of the money market.

A parallel adjustment in short-term money market rates was, therefore, appropriate in relation to domestic monetary needs, including the need to maintain control over the monetary aggregates. The move in MLR followed the operation of the formula based on the previous Friday's Treasury Bill tender before which the Bank had indicated that it was content with an upward adjustment.

asked the Chancellor of the Exchequer what is his estimate of the effect of the increase in the MLR by 2 per cent. upon industrial investment, mortgage rates and domestic credit.

There will inevitably be some increase in costs to industry in the short term, although the amount will depend on how far the banks raise their base rates. Maintaining firm control over the money supply should, moreover, help confirm to industrialists the Government's determination and ability to bring down the rate of inflation, and that provides the basis for a sustainable fall in interest rates over the long term. Even after the rise in MLR building society rates are about 2 per cent. above the money market rates with which they are usually compared.

asked the Chancellor of the Exchequer what is his estimate of the effect of the increase in the MLR by 2 per cent. upon the inflow of foreign funds into Great Britain and upon the value of the £ sterling against the dollar and against the sterling index.

The change in exchange market intervention tactics announced on 31st October means that any increase in the demand for sterling should be reflected more by a change in the exchange rate than by any significant increase in the reserves. But experience suggests that the demand for sterling is not always very sensitive to changes in interest rates; it is, therefore, unlikely that the MLR increase will have much impact on the exchange rate. The change will do no more than bring United Kingdom interest rates at the short end broadly in line with New York and Eurodollar market rates.