An increase in interest rates would be particularly damaging to an economy with the UK’s level of indebtedness. A one percentage point rise in interest rates would add around £21 billion to debt interest payments. That is why the Government are determined to keep Britain’s fiscal credibility and to keep our interest rates low. A 1% rise in lending rates would add £10 billion to household mortgage interest repayments and £7 billion to business costs.
Forty per cent. of households in Stratford-on-Avon—some 17,870 home owners—have a mortgage secured against their home. Will the Chancellor confirm that each percentage point increase in interest rates would cost the average household £1,000, and that adopting Labour’s plan B and seeing our interest rates reach those of Italy would mean £89 million being taken out of the local Stratford-on-Avon economy?
My hon. Friend is right that a 1% rise on the average mortgage bill would add £1,000. That is why it is particularly important at this time and in this debt crisis that we try to keep our interest rates low. That is what the credibility of our fiscal policy is doing.
Yesterday, millions of families across Europe faced a bump up in their uncertainty in their financial affairs as Standard & Poor’s, the rating agency, said that it was looking potentially to review their countries’ debt ratings downwards. Will the Chancellor please tell us what has happened to Britain’s debt rating since the election and what the result has been for British interest rates?
The UK is the only western country that has seen an improvement in its credit rating in the past 18 months. When this Government came to office, the country’s triple A credit rating was on negative watch, which is where it was put by the Labour party. I am delighted that it came off negative watch, but we must stay vigilant. The credit rating agencies have said that an abandonment of our deficit plan would definitely lead to a downgrade of the credit rating.
My hon. Friend is absolutely right that an increase in interest rates at this time would also hit businesses with loans and lead to an additional £7 billion of business costs, which would mean some businesses failing and jobs being lost. It is all the more reason why we must maintain our fiscal credibility; it is all the more reason why every single business organisation supported our business statement last week; it is all the more reason why international organisations are backing what we have done; and it is all the more reason why the shadow Chancellor cannot find a single credible party in western Europe that supports what he is doing.
Why should anybody take a blind bit of notice of the Chancellor’s forecast on interest rates when he has only been in power for 18 months and he has got every other economic indicator wrong? For Christ’s sake, don’t go to the Prime Minister and ask him to bail you out because he was economic adviser to Norman Lamont, who lost £10 billion in an afternoon and never went near a betting shop.
The hon. Gentleman is the man who has supported a party that said there would be no more boom and bust and that gave us the biggest ever boom and the largest ever bust. I will tell him what has happened since the general election: the deficit is coming down and credibility is going up.
What we are talking about here are the market interest rates. Italian and Greek households and businesses are looking not at the European Central Bank official interest rate, but at the market interest rates. The market interest rates that we are paying in this country are less than 2.5% and that is a sign of the credibility that we have earned in a debt crisis. That is what we have done. Instead of opposing the difficult decisions that we have taken to put our public finances in order, the right hon. Gentleman should be supporting them.
The Chancellor will be aware that around 40% of Treasury bonds issued this year will be bought by the Bank of England and that the Bank concluded in its last quarterly bulletin that quantitative easing—printing money—accounts for a fall in gilt interest rates of around 1.25%. For the sake of clarity, can the Chancellor say whether he agrees with that Bank of England analysis or is he seriously saying that printing money has no impact whatsoever on low bond interest rates?
The low interest rates were there before the Bank undertook its quantitative easing programme in the autumn. We have had low market interest rates for the whole of the past 18 months, not just when the Bank of England has been undertaking its QE programme. This is what the chief economic adviser to the Treasury said in 2004: long-term interest rates are
“the simplest measure of monetary and fiscal policy credibility.”
That was Mr Edward Balls.