Britain's EC gain: lower interest rates
Now that Prime Minister Margaret Thatcher has won back L710 million ($1.63 billion) of Britain's excessive contribution to the European Community this year , what will she do with it?
Dull as it may sound, the issue excites broad interest n this economics-conscious nation.
The answer: She will cut interest rates.
Mrs. Thatcher is not saying when. But money-watchers in London, searching the horizon for a sign of timing, thought htey had seen one in five words she uttered in the House of Commons June 3. She told Parliament the rebate should go toward reducing the public-sector borrowing requirement "and therefore reducing interest rates."
(When the government borrows less, it reduces total demand in the money markets for loans and thus interest rates.)
In the next hour, the pound plummeted nearly 5 cents against the dollar in what was described as "panic selling," until the Bank of England intervened. It has since recovered.
The incident indicates how tightly strung the financial community has become over the vexed question of the minimum lending rate, which sets the level of borrowing terms for everyone from corporate financiers to home buyers.
The government wants it high (it is now at a record 17 percent) to slow borrowing and thus damp inflation.
But resistance is stiffening:
* Homeowners, whose monthly mortgage payments rise or fall with each variation of the minimum lending rate, are screaming. "It often amazes me how people can buy homes," mused Robert Crockett, a senior partner with the London real estate firm of Cluttons.
* The Tory-minded Institute of Directors has called for lower rates.
* The prestigious Confederation of British Industry, in what the Financial Times newspaper called the most critical statement on government policies by industry since the general election, took the occasion of its annual dinner in May to light into the chancellor of the exchequer, Sir Geoffrey Howe, over the issue.
* Annual reports from British companies are speckled with references to the damage done by what Sir Peter Matthews chairman of Vickers, calls "exorbitant" interest rates.
* Even the Cabinet is rumbling. "I still don't understand why we have to have interest rates so high," Employment Secretary James Prior told the Minor recently. A well-known critic of Mrs. Thatcher's policies, he added that, "We could be much braver about our interest rates," bringing them down without damaging the major thrust of government anti-inflationary policy.
He will no doubt have his say at an all-day Cabinet meeting on economic policy scheduled for July 16.
Meanwhile, however, the government is holding firm. It has set its face against what Treasury Minister John Biffen calls "a policy of fits and starts." It intends to cling to its anti-inflationary policy, painful though it is, until major indicators show that money supply and hence, it believes, inflation are under control.
Some say it can afford to wait. The next election is four years off, when, it hopes, its policies will be seen to have collared inflation.
The British are accustomed to a quick stop-go cycle -- like the recent American shocker that sent the prime rate to 20 percent and then dropped it rapidly to 13 percent.
"It's never been at a panic rate, an emergency rate, for more than three months," says Alistair McGregor of Sheppards & Chase, stockbrokers. The Tory government's determination, coupled with the lifting of exchange controls so that British money can flow freely into other countries, is at the root, he feels of this new situation.
When the rate went up last autumn, he predicted it would fall by Christmas. Now he hopes it will come down by December.