Thatcher Backs Lawson, Agrees to Cut in Rates
In a development expected to ease uncertainty on global money markets, Prime Minister Margaret Thatcher on Tuesday ended a long-simmering public feud over economic policy with Chancellor of the Exchequer Nigel Lawson, agreeing first to cut interest rates, then staunchly supporting him in a parliamentary statement.
“The chancellor and I entirely agree,” she declared to a House of Commons crowded with members who had come to hear her being questioned on the rift.
The one-half-percentage-point cut in Britain’s base lending rate to 7.5%, coupled with Thatcher’s statement, triggered a wave of profit taking that quickly halted the pound’s sharp rise of recent weeks.
Sterling dropped quickly from a 30-month high against the West German mark, closing down 2 pfennigs at 3.17 marks, and also declined against a basket of major currencies. Tuesday’s improved U.S. trade figures brought even sharper drops against the dollar, with the pound closing the day in London nearly 3 cents down at $1.8637.
The combination of events seemed to end, at least temporarily, one of the most potentially damaging political feuds of Thatcher’s nine years in office.
History of Differences
Lawson is easily the most highly regarded member of her Cabinet and is widely viewed as being among the best chancellors since World War II. Thatcher’s move to publicly challenge him on such a market-sensitive element of economic strategy as exchange-rate policy raised concern among members of her party, encouraged her opponents and threw money markets into confusion.
While Lawson has long argued that exchange rate stability is the key to ensuring Britain’s renewed economic prosperity, Thatcher last March stunned those who follow fiscal policy by declaring to Parliament that she was not averse to letting the pound rise.
“The pound shouldn’t be restrained,” she stated.
Two days later, she again underscored her differences with Lawson, declaring, “You can’t buck the foreign exchange markets.”
She maintained that renewed inflation was Britain’s real danger and that she saw the basic tools of currency stabilization--interest rate cuts and the large-scale interventions on foreign exchange markets--as inflationary.
While Britain has one of the most buoyant economies in the industrialized world, its inflation rate of about 4% is considered high.
With the differences between the two strongest personalities in the government suddenly out in the open, the pound climbed steadily as speculators decided that Thatcher’s commitment to a hard currency and high interest rates made sterling a buy too attractive to pass up.
Lawson’s Terms Met
The first indication that the feud had been resolved came shortly after noon Tuesday, with the announcement that the country’s major commercial banks had lowered interest rates. The move was seen as a clear victory for Lawson.
While Thatcher stopped short of specifically endorsing her chancellor’s priorities, her parliamentary statement, coming only hours after the interest rate cut, left the clear impression that the rift had been healed on Lawson’s terms.
“The chancellor and I entirely agree that we must maintain a firm monetary policy and a downward pull on inflation,” she told the Commons. “I agree with his budget speech--every bit of it.”
With Lawson at her side in a demonstration of solidarity, she pledged her readiness to use both interest rates and intervention as instruments of policy, then warned, “It would be a great mistake for any speculator to think at any time that sterling was a one-way bet.”
Her performance was in marked contrast with that of last week, when on three separate occasions she avoided answering questions from opposition members of Parliament asking if she agreed with her chancellor.
That evasiveness increased market uncertainty, drove sterling higher and sparked rumors that Lawson might resign.
While a sense of relief followed Tuesday’s developments, many financial analysts questioned whether the events represented an end to the disagreement or merely an uneasy truce.
“Lawson won, not on the strength of his argument, but because the government was seen to be in disarray,” said William Martin, chief economist at the London securities house of Phillips and Drew. “If the pound starts to gather new strength, then precisely the same problem will return.”
Norman St. John-Stevas, former leader of the House of Commons, added that Thatcher “realized the overwhelming majority of her party in the House of Commons was behind Mr. Lawson.”
Criticism From Industry
Ironically, the differences between Thatcher and Lawson spring from their joint success in reviving Britain’s perennially lethargic economy. Wrestling with the problem of a strong pound is a relatively recent affair for a post-World War II British government.
Thatcher, who equates a strong currency with strong government, has little difficulty accepting the rise in sterling. She also believed that a cut in interest rates would further risk overheating the domestic economy.
But in addition to coming under severe political pressure for appearing to undercut her chancellor, Thatcher also drew criticism from industry.
“For many companies in export markets, the recent appreciation (of the pound), both against the deutsche mark and the dollar, has removed a large slice of profits on exports, if not their entire export margin,” said John Banham, director general of the country’s leading employers’ association, the Confederation of British Industry. “That’s very, very serious, because it’s manufacturing that has made the difference in the past two to three years.”
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