To ask the Chancellor of the Exchequer what are the current short-term interest rates in (a) the United Kingdom and (b) West Germany.

At close yesterday, three-month interbank market rates were 13·9 per cent. in the United Kingdom and 9·2 per cent. in Germany. However, today the Bundesbank has raised its official discount and Lombard rates by a further ½ per cent.

Does the Chancellor agree that any neutral observer hearing those figures for the first time would assume that Germany was the country with oil? After 12 oil-rich years and with sky-high interest rates, sky-high mortgage arrears, sky-high repossessions and sky-high bankruptcies is not it time that the Government broke the habit of the past 12 long years and apologised to the electorate?

The hon. Gentleman might also have referred to the fact that in the 1980s, the British economy grew faster than the Germany economy. He seemed to leave that out of his comparison between this country and Germany. I appreciate that interest rates are high and that that is causing great difficulties for many businesses. However, the discomfort for the business sector is inevitable if we are to get on top of inflation. Inflation, especially for businesses in the international market which compete against German businesses, matters too. Businesses will not be able to compete against Germany unless we get inflation down to levels far closer to Germany's.

In view of today's raising of the discount rate by the Bundesbank, can we politely make representations to the Bundesbank and the German Government, as I assume we already have, explaining that, while we fully appreciate the great burden on them posed by the economic refurbishment of eastern Germany, we very much hope that they will seek to deal with this by fiscal rather than monetary methods? If they continue to raise their interest rates it will cause considerable problems for partners of theirs in the exchange rate mechanism and, indeed, possibly have an adverse effect on both American and Japanese interest rates as well.

As my hon. Friend would expect, we have discussed the question of the German deficit and the financial consequences of the unification of Germany both at the G7 meeting and at the recent meeting of EC Finance Ministers. The Germans have made it very clear that they understand our concerns and, most important, that they intend to limit their budget deficit and to make the expenditure and tax adjustments necessary so to do.

Does the Chancellor agree that if it were widely believed that the Government were on course to defeat inflation the pound would not be so low in its exchange rate bands and the Chancellor would find it much easier to narrow the gap with regard to German interest rates? Are not our present penally high interest rates a premium for the Government's past mistakes?

Exchange rate markets—although I may be overstating the hon. Gentleman's influence—are also influenced by endless calls for premature cuts in interest rates. No, I do not agree with what the hon. Gentleman says. Indeed, I think that it is very clear from looking at outside forecasts that people expect us to reach our inflation target and many independent forecasters think that we may do rather better.

Does my right hon. Friend agree that the determination by the British Government to hold to the central rate within the ERM will increase the confidence of the holders of sterling in continuing to hold sterling and therefore allow a lower rate of premium for sterling interest rates against those of the deutschmark? Is not this the most virtuous way of ensuring that our rates will fall as inflation falls?

My hon. Friend is absolutely right. We all knew what the consequences would be when we chose to join the exchange rate mechanism and I assume that right hon. and hon. Gentlemen who urged us to join were also aware of the consequences. Our overwhelming priority must be to stick within the bands of the ERM, but it is true that, as the underlying rate of inflation is seen to come down, so the scope for interest rate reductions may become wider.

Does the Chancellor accept that, even with this morning's announcement from Germany, our interest rates are still very substantially above those elsewhere in Europe? Will the Government finally wake up to the fact that their policy of exclusive reliance on high interest rates for demand management has succeeded in plunging this country into recession, starving industry of investment funds and ensuring that our economic performance has been far worse than Germany's?

I do not see how the hon. Gentleman can say that our economic performance has been worse than that of Germany when our growth rate, our manufacturing output performance and our manufacturing investment in the recent past have all grown faster than those of Germany. As regards the hon. Gentleman's last point, I do not understand why he persists in saying that we rely only on interest rates when we have one of the tightest fiscal positions of any of the G7 countries. As regards the hon. Gentleman's first point, our interest rates are higher than those of Germany because our inflation rate is higher. Our real rates of interest, which measure the real burden on industry, are not higher than those of France, Germany or, indeed, Italy.