Monetarists call for Bank to tackle inflation

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THE 'Liverpool Six' group of monetarist economists, who long advocated that Britain should leave the European exchange rate mechanism, said yesterday that an independent Bank of England should be entrusted with pursuit of zero inflation, writes Robert Chote.

The six - who include Sir Alan Walters, Baroness Thatcher's former adviser - argued that the Bank should set a new target for a broad measure of the amount of money circulating in the economy.

Most of the six believe the Bank should aim to ensure that the M4 measure of money supply, which includes cash and bank accounts, grows by between 7 per cent and 11 per cent in 1993-1994.

M4 grew by 5.5 per cent in the year to August.

They added that the Government had to keep tight control of public spending, balancing its books on average as the economy sped up and slowed down.

'We believe that Treasury ministers are right to seek further cuts in public expenditure,' they wrote in a letter to the Times.

The six disagree on the importance that should be attached to particular measures of the money supply, but all argue that large interest cuts are justified and that the pound should remain outside the exchange rate mechanism.

'The exchange rate should be allowed to float and the sale of Britain's foreign currency reserves should be reduced,' said Bill Martin, of UBS Phillips and Drew.

'Monetary indicators are not a perfect auto-pilot, but they are a much better framework than the rigidity of the ERM,' said Professor Patrick Minford, of Liverpool University.

He added that an independent Bank would be needed to give credibility to a new policy regime.

'Mr Lamont has been in favour of the ERM, he was a monetarist before that and will be who knows what tomorrow.'