asked the Minister for Finance the major factors which, in his view, will most likely determine the exchange rate of the punt in the short and medium term.
Ceisteanna—Questions. Oral Answers. - Exchange Rate.
1.
Experience has shown that, over time, exchange rates are determined primarily by the relative performance of economies in such areas as costs, prices, wages and the public finances. Pursuit of sound polices in these areas will tend to give exchange rate stability, particularly over the medium-term. The objective of the Government's exchange rate policy has been to seek such stability in the context of the EMS, with a view to consolidating progress in reducing the rate of inflation.
The stance taken at the recent realignment was fully consistent with this objective. In the short term, transient factors such as speculative capital movements can have a major influence on exchange rate developments. In our case, however, the potential impact of such transient influences is reduced by the pound's participation in the EMS exchange rate mechanism and the narrow margins of fluctuation which this implies vis-à-vis our EMS partners.
Would the Minister agree that the relative strength of the punt in recent times, aided by the Minister at the recent conference, puts a heavy burden on our exports and has many of our potential exporters worried? Does the Minister think he was well advised to maintain the strength of the punt in that context?
I do. I do not accept the position as stated by the Deputy. A large part of our industry is very cost sensitive and therefore would be adversely affected if there was to be a resurgence of inflation, which would be the result of the Government failing to pursue their policy in regard to the exchange rate. Depreciation in the exchange rate would tend to lead to a resurgence of inflation and to put interest rates up, because if the punt was seen to be a currency, because of relatively transient factors, which through Government action was liable to be devalued, this would tend to increase speculation against the currency, the direct result of which, of course, would be to push up interest rates. The purpose of our policy has been to try to ensure that inflation will continue to fall, that nothing will be done to lead to a resurgence of inflation, and to achieve the same result in regard to interest rates. Both of these are very important to the success of Irish industry which, as I said, is both cost sensitive and interest rate sensitive.
Does the Minister agree it is because of this cost sensitivity that it is important to appreciate that some reduction in the strength of the punt would give the encouragement and boost needed by our manufacturers and exporters, agricultural and industrial, that would stimulate some increase in employment? Would the Minister agree that there is no great merit, per se, in having an inflation rate of 3 per cent, 4 per cent or 5 per cent if a concomitant of that is the unemployment rate we have at present? Would it not be better if our inflation rate were a couple of points higher and our unemployment rate a couple of points lower?
The unemployment we have at present is due in large measure to the failure of previous Governments to get inflation down. The high costs that obtained at that time put many businesses out of business and resulted in such high unemployment at the moment. It must be borne in mind that the benefits, as Deputy Taylor sees them, of devaluation would very soon be lost because very quickly a company, although it might have a slight edge on sale prices, would find that the cost of its raw materials, a large proportion of which are imported would go up. As soon as that would happen the "benefits" of the soft exchange rate would immediately disappear. I think it is far better for the health of the economy to establish quite clearly that we have a currency that will stay not just within the EMS formally but as a matter of policy. We have established that quite clearly and I do not think that currency speculators will be as inclined to speculate in future as they have been in the past. We have established the credibility of our policy, which I believe is the best possible one from the point of view of getting unemployment down. It is only by having a competitive economy that we are likely to get unemployment down. Already, as I will be saying in reply to a later question, the rate at which unemployment has been rising has been very dramatically diminished since high inflation obtained.
Prior to realignment within the EMS, which meant depreciation of our currency by 2.9 per cent against the Deutsche Mark and the guilder, our currency was less valuable than it is today, after the realignment. Depspite the realignment, our currency has now appreciated against both the Deutsche Mark and the guilder. Is that not a conequence of our interest rates, which are outrageously out of line with those applying in the Federal Republic and the Netherlands? Is it not a fact that the policy pursued by the Government of soaking up the private market for public gilts and other public funds, is bringing unnecessary pressure on our interest rates? Does the Minister realise that despite realignment we now find ourselves less competitive today vis-à-vis the Deutsche Mark and the guilder in regard to exports to the Federal Republic or the Netherlands, even after a revaluation of about 3 per cent in respect of both currencies?
I do not propose to comment on daily movements in rates, up today, down tommorrow and up the following day. To make policy pronouncements on the basis of what happened yesterday and what might happen tomorrow would not be very sensible. I am glad to be able to tell the Deputy of our policy in regard to interest rates. He will probably be aware that the AAA and the AA rates are coming down substantially as a result of action by the Central Bank. I expect that will continue. I intend to do all that is prudent in regard to Government finances and borrowings to continue the downward trend in interest rates. It is very important that interest rates should come down substantially, and I will be pursuing this matter with all the means at my disposal.
I know the Minister is taking a different position from that which his predecessor took when he claimed that interest rates were not a matter for the Government at all. Now the Minister is claiming credit for the reductions in the AAA and AA rates.
I had an input.
He may have had an input and we might welcome it if he were to follow that line all the time. Does the Minister not acknowledge that allowing for a reduction in the AAA and the AA rates, which are simply and adjustment from the increases imposed a short time ago, it is a fact that our interest rates generally, even allowing for the reduction, are very much higher than those in other EMS countries, and is that not one of the main reasons why we find, despite realignment, that our currency has grown consistently since realignment, not up a day, down a day? It has grown to a level which is higher than it was before realignment, so that effectively we have seen an appreciation of 3½ or 4 per cent. Does that not deal with Deputy Taylor's submission that until we control interest rates effectively, through Government policy especially, by not intervening too much in the money market, we will not be in a position to be competitive?
I am not prepared to comment in any definitive way on what might have happened to the relationship of the IR£ to the Deutsche Mark or the Guilder over the past week. The Deputy will probably be aware that there was an amount of leading and lagging going on prior to realignment and money was going out of the country in the way that people were settling their bills. Once realignment was behind us, that trend reversed and the money started coming back. That may account for the temporary movement with regard to the relationship between the IR£ and the other currencies which were not the subject of any adverse currency speculation prior to realignment.
Not wishing to offer the Deputy any advice on economics, I do not think that we should draw too many conclusions from what might have happened during the past week. However, to come to the main burden of his question, I share his view that interest rates here are too high. This is not the first time I have said that. I said it before and after realignment. I said it at every possible opportunity and intend to continue saying it. Government cannot bring rates down. I have already told the Deputy that I intend to do everything I can with regard to our own public finances policy and borrowing policy, to influence the movement of interest rates in a downward direction. Not much purpose would be served by being more precise than that. I am sure the Deputy will understand.
The Minister's predecessor would not allow the Government even to influence interest rates.
A final supplementary question.
I appreciate that the Minister is being as helpful as he can considering the financial pressures in the whole interest rate area. It would be helpful if he could confirm to the House that it is now the Government's view that there is ample scope for a reduction in interest rates without, obviously, jeopardising the punt exchange rate within the EMS. If the Minister gave that confirmation, that would have its own effect. Today would be a good opportunity to do that.
I made that fairly clear in my response to Deputy Taylor's question. I think there is scope. I would hesitate to use the adjectives "large" or "substantial" but there is certainly scope for reduction. It would be my policy within the limits of prudence, of course, to pursue a policy designed to help in bringing down interest rates, which would help us to be competitive. A sound money policy, accompanied by measures to bring rates down would be a better policy, with due respect to Deputy Taylor, than devaluation which brings purely short term benefits. The evidence is that the pursuit of that type of soft money policy tends to be accompanied by high unemployment because of the uncertainty and inflation which it generates.
The reverse is the situation.