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Interest Rates

Volume 113: debated on Tuesday 26 May 1987

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1.

asked the Chancellor of the Exchequer what representations he has received about interest rates; and whether he will make a statement.

13.

asked the Chancellor of the Exchequer what representations he has received about interest rates; and whether he will make a statement.

16.

asked the Chancellor of the Exchequer what representations he has received about interest rates; and whether he will make a statement.

Bank base rates are now 10 per cent. and a 1 per cent. reduction in most mortgage rates has been announced.

I congratulate my right hon. Friend on his Budget and on the consequences of it. As each percentage point change in interest rates represents about £80 million to the British agriculture industry, does my right hon. Friend accept that farmers and other small business men would welcome the further fall in interest rates that would be likely to flow from membership of the European monetary system?

I note my hon. Friend's support for British entry into the exchange rate mechanism of the EMS. I am sure that farmers and small business men will widely welcome the fall in interest rates that has taken place, as home owners will welcome the fall in mortgage rate announced from 1 May. I am sorry that the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) is not here to learn the good news. He has certainly not apologised or informed me that he will be back late from one of his well-known lunches.

Does my right hon. Friend agree that the Budget was especially welcome because a large reduction in borrowing led to lower interest rates and lower mortgage rates? Is he aware that the average family with a mortgage will be £5 per week better off, in stark contrast with Opposition policy, which would penalise that family through higher taxes and higher mortgage rates?

My hon. Friend is right. A contributory factor which has enabled interest rates to come down has been that we have managed to bring the public sector borrowing rate down to 1 per cent. of GDP, a figure reached only twice previously since 1950. Another major influence has been the enormous increase in world confidence in the British economy. As soon as the right hon. Member for Sparkbrook forecasts a crisis, the markets know that everything will come right.

Is my right hon. Friend aware of how well his Budget has been received in the City, where there is still confidence and considered optimism even a week later? Does he agree that the fall in interest rates before and after the Budget are the consequence of the prudent measures that he has taken in reducing Government borrowing to 1 per cent. of GDP?

I am grateful to my hon. Friend for his remarks about the Budget, which has been well received not just in the City, but throughout the country. I noticed that the MORI poll in The Sunday Times gave it the most favourable rating of any Budget since 1979. Even more important, as a result of the successive Budgets that I and my predecessors have introduced since 1979 the British economy is more sound than it has been at any time since the war.

Why has the cut in interest rates taken so long? Is the Chancellor aware that it will not be lost on the British people that he and his predecessors have presided over double figure interest rates for the entire seven-anda-half-year period? That has not been true of any other Government since the second world war. Is the Chancellor aware that the British people also recall that when the Government managed to bring interest rates down temporarily in 1983 they put them up again as soon as the election was over?

Interest rates today are lower than they were when we took over from the Labour Government in 1979. However, if by any mischance Labour were returned to office, interest rates and inflation would go sky-high again.

Does my right hon. Friend accept that it is considered, not only by those on the Government Benches, but by many other informed people, that his Budget is the best since 1979? Does he also accept that many of us think that his important action was to help interest rates to come down and that the Bank of England should follow his excellent lead, particularly bearing in mind today's trade figures?

For as long as I have known him, my hon. Friend has consistently stressed the importance of interest rates. I am glad that he now welcomes the fact that they have come down a bit. He is also right to point to today's excellent current account of the balance of payments figures, which shows a surplus so far this year of £½billion.

As the explosion in private sector borrowing, which is now running at more than 10 per cent. of GDP, was identified in the Chancellor's Red Book as the major upward pressure on interest rates, why is the Chancellor doing nothing to restrain that, and succumbing instead to his obsession with the public sector borrowing requirement? Is that not another example of political prejudice overriding the needs of the economy?

As usual, the hon. Gentleman is entirely mistaken. The chart in the Red Book shows that, while public sector borrowing has declined as a proportion of GDP, private sector borrowing has indeed increased. The totality of borrowing has, however, declined slightly. The big increase in private sector borrowing is a result of the tremendous increase in people buying their own homes on mortgage. We all know that Labour Members are opposed to home ownership, as that last intervention showed.