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Exchange Rate

Volume 83: debated on Thursday 25 July 1985

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10.

asked the Chancellor of the Exchequer if he will make a statement about the exchange rate.

Has the Chancellor of the Exchequer read in today's press the criticism by the director general of the CBI, Sir Terence Beckett, of the rise in the exchange rate? He says that if the exchange rate goes any higher it will unfairly threaten the competitive position of British firms in foreign markets. Does the right hon. Gentleman recall that a few years ago, because of a sharp rise in the exchange rate, which was totally artificial, many soundly based firms in this country ran into serious difficulties? Will the Chancellor tell the House whether he has an exchange rate policy and what it is?

I recall that when sterling was temporarily falling during the early part of this year I was called to the House to answer a private notice question tabled by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), who was complaining about the fall. Now I see that the Labour party is complaining about the subsequent recovery.

In retrospect, does my right hon. Friend not think that a good time to have joined the exchange rate mechanism of the EMS might have been around the end of January, when the pound-deutschmark exchange rate was about 3·5?

The fundamental question about the EMS is not particularly the exchange rate at which one joins, although that is obviously a matter of significance, but whether it is in the interests of this country to join at all. As my hon. Friend will know, we keep that matter constantly under review, but at the present time we do not think that it is in this country's interests to join.

The Chancellor seems intent on using the rising pound and record real interest rates to recreate the economic disaster of 1979 to 1981. Is he aware that the pound is now more than 50 per cent. undervalued in real terms against the deutschmark compared to the average of 1973 to 1976, and that our deficit in manufactured trade with the EEC is now higher than the entire EEC deficit in manufactured trade with Japan? How can we improve the situation with the pound at that valuation?

The plain fact is that our exports, including our non-oil exports, are at records levels and that our balance of payments on current account is in surplus for the fifth or sixth — I think the fifth — year in succession. We are also in our fifth year of steady growth. We have the highest expected growth rate of any country in the Common Market, and it is also higher than that of the United States. If that is a disaster, it is the sort of disaster which the previous Labour Government would have given their eye teeth to get.

Given the present monetary conditions, as measured by MO, what possible reason is there for not reducing interest rates and thus influencing exchange rates?

My hon. Friend will be aware that interest rates have already fallen by 2 per cent. from their peak earlier this year, and the future course of interest rates will be affected by what happens on the foreign exchange markets.

Will the Chancellor tell us whether the value of the pound is the result of a deliberate policy decision by the Government, or whether it is simply due to drift?

This is the first time that I have heard of such a recovery being attributed to drift. Although I am happy to accept the Government's responsibility for taking the exchange rate into account in their monetary and financial policy, as they must, they do not have the power to set a particular exchange rate. That is set by the foreign exchange markets.

Does the Chancellor accept that the levels of domestic interest rates are influencing the exchange rate? Will he listen to the widespread anxieties of industry about increased levels of unemployment and about liquidations later this year if the present levels of interest rates and the present exchange rate continue?

The present exchange rate is almost exactly what it was at the time of the last general election in 1983. Had we taken the advice given during the election campaign by the Social Democratic party and joined the EMS at the then rate, that would have been a fixed rate and we should have remained at it until now. I fail to see what the hon. Gentleman is complaining about.