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Interest Rates

Volume 13: debated on Thursday 19 November 1981

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asked the Chancellor of the Exchequer whether he will make a statement on the level of interest rates.


asked the Chancellor of the Exchequer if he is satisfied with the present level of interest rates.

When interest rates rose in September we pointed to two main factors—external considerations and the rapid growth of bank lending. Rates have now come down a little. Further progress will continue to be affected by both internal and external factors and not least by the extent to which Governments can restrict the size of their borrowing.

Why has the Bank of England been intervening recently to hold up the high level of interest rates? How does that assist industrial confidence or commercial recovery?

The level of interest rates on any given day depends on a number of factors, including the size of the demand for money and the price at which it is, and can be made available. The Bank of England is only one of the factors present in the market.

Does the Chancellor of the Exchequer realise that his answer will be regarded as complacent by business men? Many of them voted Conservative at the last election and they regard high interest rates as crippling to their businesses and as causing the high level of bankruptcies. By the Government's adherence to such interest rates, they are preventing economic recovery and destroying the nation's industrial fabric.

It is perfectly well understood that high interest rates are less attractive and less conducive to economic effectiveness than low interest rates. They are a manifestation of inflation and of the high demand—particularly of Governments round the world—for borrowing, which pushes up interest rates. This country is close to being unique in being so preoccupied with the proposition that we can bring down those interest rates by spending and borrowing more. If the hon. Gentleman takes counsel from the advice being given to countries throughout Europe and from the advice being given in North America, he will see the central lesson, that interest rates can be lowered by reducing the demand that Governments make for borrowing in the market place.

Although my right hon. and learned Friend wishes to ensure that stimulation of demand comes naturally, does he agree that it can be stimulated by new investment from industry? Does he accept that it is important to point out to industry that although the Government wish to do everything possible to keep interest rates as low as possible, those rates do not rest entirely in the Government's hands?

My hon. Friend is entirely right. As I have said, interest rates are affected by the size of borrowing by other Governments around the world. The possibility of investment by industry also depends on its continued success in reducing its other current costs.

Is not the right hon. and learned Gentleman aware of the perplexity of the money markets, because, despite the fall in interest rates in the United States of America as well as in Europe, the Bank of England intervened to keep up interest rates and, consequently, to keep the exchange rate higher than it would otherwise be? That is to the enormous disadvantage of our manufacturers and exporters, whose interests have been overlooked by the Government for far too long. Will the right hon. and learned Gentleman explain the monetary nonsense behind all this.

The right hon. Gentleman well knows from his experience in Government that the level of interest rates depends not only on external factors but on the rate of growth of the money supply and on the scale of growth of bank lending. All those factors are taken into account. If they are neglected in the pursuit of low interest rates for their own sake and set aside for the sake of expanding Government borrowing, the consequences will be the exact opposite of what industry desires.