Below is the text of Mr Major’s response on interest rates made on 15th February 1990 in the House of Commons.
Mr. Anthony Beaumont-Dark To ask the Chancellor of the Exchequer what recent representations he has received about interest rates and their effect on the economy.
Mr. Major I have received a number of such representations.
Mr. Beaumont-Dark Does my right hon. Friend accept that many people in the House and outside it admire the way in which he has tackled his job in the few short weeks that he has been Chancellor of the Exchequer? Does he further accept that many of us hope that the belief that the pound and interest rates ought to be tied to the deutschmark has been buried? Because of the Germans’ headlong and precipitant flight to a new fatherland, their inflation is likely to be very high. If Germany’s interest rates increase 1 per cent., may we have an assurance that our interest rates need not follow, because British industry could not sustain such a rise or compete with it?
Mr. Major I am grateful to my hon. Friend for the first part of his question. As to the second part, I shall continue to judge interest rate levels against what I think is right for the country’s counter-inflation policy.
Mr. Beith Does the Chancellor realise that yesterday’s announcement by one building society of increased mortgage rates spells personal tragedy for many people as well as great pressure on wage negotiations in the coming year? Can the Chancellor give the other building societies any hope of a reduction in interest rates while he refuses to make a clear commitment to Britain’s early entry into the exchange rate mechanism, or should all building societies increase their interest rates in anticipation that base rates will remain high?
Mr. Major It would be very attractive to be able to stand here and say that I foresee an early reduction in interest rates. However, I must tell the hon. Gentleman and the House that it would be unwise to make such a commitment until I am certain both that it would be right in terms of beating inflation and that once we bring interest rates down, we can safely keep them down.
Mr. Ian Stewart I thank my right hon. Friend for that answer, and I am sure that he will have strong support from Conservative Members in making sure that the campaign against inflation is maintained for as long as it need be. Will my right hon. Friend emphasise that an increase in mortgage rates is not the same as an increase in the rate of inflation? In that respect in particular, the retail prices index is a very unsatisfactory measure of inflationary conditions. When the RPI falls below the real rate of inflation, as it will over the next two years with falling interest rates, will my right hon. Friend take the opportunity to introduce a more realistic official inflation indicator and be prepared to adjust the annual uprating of benefits accordingly?
Mr. Major My right hon. Friend is right to say that the retail prices index as presently constituted is an inaccurate measure of the underlying rate of inflation in the British economy. He will be aware that few countries in the world include mortgage repayments in their retail prices index, as we do. I take note of my right hon. Friend’s other comments.
Mr. Robert Sheldon The Government have said frequently that if their economic policy is not hurting, it is not working. Is not the real problem that the Government’s policy is hurting manufacturing industry, investment and home owners? When will the Government open their eyes to the possibility of an alternative approach, such as credit control – which, although not perfect, can be of some help?
Mr. Major The most damaging thing for industry and for the economy as a whole is inflation. Our monetary policy is there specifically to bear down on inflation. If we had not used monetary policy successfully in recent years, I doubt whether there would have been the dramatic reduction in unemployment which all right hon. and hon. Members welcome, and which today’s announcement shows is continuing.
Sir Anthony Grant Does my right hon. Friend agree that although the battle against inflation must take priority, the burden of it is being borne excessively by small businesses and home owners? [HON. MEMBERS: “No.”] Yes it is. While I accept that my right hon. Friend cannot anticipate his Budget, will he, with his usual sensitivity, take that into consideration? After all, the need for the battle was not the fault of small businesses and home owners, but that of the Government.
Mr. Major I understand the concern felt by my hon. Friend, who is a powerful and consistent proponent of lower interest rates. I entirely sympathise with the difficulties that many home owners in particular face at present. I have to bear in mind as an overriding objective the necessity to ensure that we have the right economic conditions for bringing down inflation and for ensuring that it is kept down. I must keep that in the forefront of my mind and policy, and I propose to do so.