Prime Minister
Good afternoon, Gentlemen! May I say a few words first!
You will, of course, have heard the announcement that the interest rates are to be reduced by one percentage point on Monday and that we have applied this week-end to join the Exchange Rate Mechanism.
The fact that our policies are working and are seen to be working have made both these decisions possible. They are seen to be working from the CBI surveys, from the fall in retail sales, from the fall in the sale of cars, above all from the monetary conditions and all of those make it quite clear that we are in a position to reduce the interest rate from 15 per cent to 14 per cent. That same clarity enables us to apply for the Exchange Rate Mechanism which at the same time will underpin our anti-inflationary stance.
The most important thing is to get inflation down and these two policies are right for the times and therefore it was right to take the decisions that we did this week-end.
Would you like to ask some questions? [end p1]
Question
Were you afraid that it would lead to recession? Have you done this to avoid one?
Prime Minister
We have the interest rate which we put up just almost a year ago this week-end to 15 per cent to tackle inflation. Tackling inflation is tough; it leads to tough times for some people, but you have to do it to take the inflationary pressures out. There are clear signs inflationary pressures are being reduced and therefore it is time to take the interest rate down.
Question
But have you done this so that you have got some good news to give the Tory Conference next week?
Prime Minister
No. We have done it because the policy is right. I don't think you can accuse us of doing it for the Tory Party Conference because you could hardly accuse us last year of putting the interest rate up at the same week-end because there was a Tory Party Conference. We have done both things because they are right for the economy at the present time. [end p2]
Question
But you said, Prime Minister, that you wanted our inflation rate to be more in line with that of our European partners.
Prime Minister
I think that you will find that those of our European partners are also rising. They are also affected, perhaps even worse than we are in a way, by the oil crisis and therefore I think that we will move in the coming months nearer to the European average. We do not know precisely how the oil price will affect the Retail Price Index because we do not know what will happen to the supply and demand position there. Our Retail Price Index is, of course, calculated on a different basis from that of Europe, which gives a higher apparent rate but the underlying rate is nearer to the average than the Retail Price Index indicator seems to say.
Question
Have you had a lot of encouragement from your European partners, Prime Minister? Is everybody happy to see Britain enter it?
Prime Minister
They were always expecting us to join at some time because it was fifteen months ago at Madrid that we confirmed that commitment that we would join when the time was right. We clearly wanted to be on top of our own policies as far as inflation was concerned and to have evidence that the 15 per cent interest rate was [end p3] in fact working and, as I have indicated, there is multiple evidence to that effect.
Is there someone else who would like to ask a question? Can I cope with the television first? Are there any other television people that would like to ask a question? No! We are through with television! Could you shout?
Question
Do you now feel that the pound might come under pressure on the foreign exchanges?
Prime Minister
The pound has gone up since the announcement was made.
Question
Prime Minister, do you think the Madrid conditions have now been fulfilled?
Prime Minister
Yes, I think the Madrid conditions not only have now been fulfilled but the conditions which enable us to put down interest rates have been seen to be fulfilled.
If you look at the Madrid conditions, during the interim fifteen months since we announced those conditions, there has been a good deal of freeing-up of financial services in Europe—that was vital; there has been a good deal of freeing-up of competition although there is in fact further to go. We are all affected in [end p4] the same way by the oil price rise except that we might be slightly better off than our European partners as far as that is concerned.
Question
But Prime Minister, aren't all the indications that our inflation rate is going to go up against next week?
Prime Minister
We cannot foretell what the Retail Price Index will be because we do not know quite in fact what the changes in the price of oil will be. That, of course, we could not have foreseen when the Madrid conditions were set down. We do think that the increased price of oil will affect all our partners in Europe. We might, in fact, be better placed than they are because after all, we have access to our own oil whereas they do not have access to any.
Question
Have you changed your stance on Stages 2 and 3 of Delors?
Prime Minister
Not in any way at all! Stage 2: we have, as you know, tried to find a fundamental compromise with the European Community because they know full well we are totally against a single currency and so is our Parliament—Government and Parliament are at one! This would make fundamental inroads into the very purpose of Parliament and we remain totally against a single currency. [end p5]
Some of our partners still wish to go towards that and therefore the John MajorChancellor and a group of people worked out the possibility of a common currency, which is different from a single currency, based on what is called a “hard” ECU and we hope that our European partners will agree to that as the next stage because we could not go to a single currency.
Question
Prime Minister, you have applied to join on Monday. When can we expect to become members?
Prime Minister
You have to apply to join at a week-end, as you know, and I would expect that we would become members on Monday and I hope that they would agree to the central rate of 2.95 DM which was the one which we thought appropriate and, of course, we have a 6 per cent latitude, as you know.
Question
(inaudible)
Prime Minister
I think I would be satisfied with what you have got for the time being. We look to see what the real conditions in the economy are and what the monetary indicators are signalling. Both of those things are what determines the interest rate that we have and how inflation is behaving in the real economy. [end p6]
Question
(inaudible … . and is that the reason for the cut today?)
Prime Minister
Inflation, if it were to continue, would in fact produce recession because as you know, in the days when some people thought inflation and unemployment were alternatives, it was very clearly said that if inflation continues, in the longer run that produces far worse unemployment than any which you might see from adjustments in bringing down inflation.
Question
(inaudible)
Prime Minister
I am very careful in forecasting these matters for the simple reason that I do not know what will happen to the oil market, which is very much a supply and demand situation—we do not know quite how much. First, it depends upon how much is being lifted, how quickly it gets to market and how people are using up any reserves they may have and how they are economising because of the increase in price. An increase in price inevitably leads people to economise and that, of course, has a down-effect on the requirements of the market.
Question
Prime Minister, can I ask you what you think the implications of these decisions are for people paying mortgages? [end p7]
Prime Minister
I think the implications for these decisions will be that the building societies will think fit to reduce the mortgage rate at the time when they normally do that and that varies from building society to building society. That is what we would confidently expect.
Question
Has the Gulf crisis had anything to do with your decisions today?
Prime Minister
The Gulf crisis has something to do with the price of oil, which therefore has something to do with the Retail Price Index. It affects, I think, most of the economies of Europe similarly and also that of the United States, although the United States—like us—has access to a certain amount of oil of its own, but the real thing that made this decision possible was the uncontestable signs that the economy is working in the way we intended it to in reducing inflationary pressures and that means that we were able to take the interest rate down by 1 per cent and it also opened the way to apply to join the Exchange Rate Mechanism.
Gentlemen, I think your questions are going round in a circle. I think we have come to the beginning of them again, so I think that will see you through the next News programme. [end p8]
The John MajorChancellor will be doing quite a lot of broadcasting. I must say we have been working extremely hard together to ensure this result and we are both very pleased.