I shall explain in detail why I do not agree with the hon. Gentleman and why all the employers I have met in the last few days share my view and not that of the hon. Gentleman.
The call for an additional 2 per cent. of Special Deposits, together with increase in interest rates, will make it considerably more difficult and expensive to obtain the sterling necessary to finance leads and lags or excessive imports. But by renewing the Bank of England's directional guideline we hope to ensure that productive industry will not be bearing the brunt of credit restraint.
The measures which I took last week were necessary to validate the economic strategy, which I laid before the House in my Statement of 22nd July. They should limit the growth of money supply—M3—to the guidelines which I announced in that Statement and ensure that we do not exceed our projected rate of Domestic Credit Expansion which I described to the House in December.
I cannot pretend that interest rates at current levels are in any way pleasing to the Government. They have already had a most unwelcome, though inevitable, effect on mortgage rates and, while they last, will put a strain on many parts of the economy. But it is quite wrong to suggest that they mean abandoning all our hopes for a rapid increase in our manufacturing investment and output. We do not want interest rates to continue at this high level and we hope that once the money supply is back on course any effect which the squeeze may have should not carry through to investment intentions.
Moreover, it is already clear from reports of industrial reaction from all over the country, well reported in the Financial Times of Saturday and yesterday's Sunday Times, that a failure to act so as to restore confidence would have been far more damaging, since the level of confidence does far more to determine investment decisions than the level of interest rates.
The bulk of manufacturing investment in fixed capital is drawn from a company's own resources. Where external borrowing is required, the rate of interest is usually less important than the degree to which capacity is already fully used and the manufacturer's prospects for the future. There was a steady increase in investment following the credit squeeze which my right hon. Friend the Member for Birmingham, Stechford (Mr. Jenkins) introduced in 1969, particularly in the export industries on which our recovery depends. The continuing pressure of export demand on existing capacity is likely to ensure that the investment intentions already declared in so many surveys are carried through in fact.
In sum, the recent measures that the Government have taken to tighten credit and to ensure that their published guidelines for growth in the money supply are met in the current year are a necessary element for the fulfilment of their economic policies. They do not put their industrial strategy at risk.
It is on the basis of this broad stance of policy that I announced nearly a fortnight ago that I would be applying to the IMF for the remaining tranches of credit available to us. The Government believe that it is prudent to make this application in order to ensure that their drawings on the June standby can be repaid and their external deficit financed in the coming year without undue strain on the reserves. [An HON. MEMBER: "What are you going to do about next year?"] I will explain about next year.
I expect a team from the Fund to visit London early in November for the usual joint examination of our prospects with the Treasury and the Bank of England. The team will then report to the Executive Board. Since the amount we are seeking is large and will require the Fund itself to seek supplementary resources under the General Arrangements to Borrow, established among leading industrial countries many years ago, time must be allowed for discussions between the Fund and those countries.
The timetable for consultations, following the normal pattern for a substantial standby, will not be completed until towards the end of December. We shall, of course, be repaying earlier than that—on 9th December—amounts we have drawn under the standby arranged in June by our fellow members of the Group of Ten industrial countries. These repayments—there has been exaggeration in some quarters about the amounts involved—will be met from our reserves, which we shall then replenish from our initial IMF drawing. Meanwhile, I am satisfied that the resources we currently have available, boosted by the on-going foreign currency borowing programme for public sector bodies, will meet our needs over the next two or three months.
I have been greatly encouraged by the response of Governments of other countries to this application, and particularly appreicate the warm remarks of leaders of the American and German Administrations, because those two countries will be important contributors under the General Arrangements to Borrow.