Cabinet knives out for Lamont: Chancellor's lacklustre speech deepens City disenchantment over 'vague' economic policy

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Cabinet and City knives were out for Norman Lamont last night after he had delivered a lacklustre economic policy statement to the Conservative Party conference in Brighton.

After one of the most hard-hitting conference debates for many years, with grassroots activists demanding interest rate cuts and a respite from the pain of recession, Mr Lamont responded with the bones of an economic policy that hinged on a reduction of inflation.

But he offered little hope of an immediate cut in interest rates, warning that he would not risk inflation for 'easy headlines'.

Despite the Chancellor's announcement of a new anti-inflation strategy, City disenchantment with Mr Lamont and his Treasury team deepened. Michael Hughes, chief economist of Barclays de Zoete Wedd, said: 'The problem I have is not with the policy or the parameters, it's with the men.'

Michael Saunders, UK economist at Salomon Brothers, added: 'The statement is sufficiently vague to allow the Chancellor to do whatever he wants. It says 'trust the Chancellor' and the markets don't'

Roger Bootle, chief economist at Midland Montagu, said: 'Given the record of forecasts and policy analysis for many years, it is wrong to proceed with the same group of people. And it is not just Lamont, it is a wider group of officials.'

However, several economists predicted that the Chancellor would cut interest rates in coming weeks and still remain true to the new anti-inflation framework. Immediate market reaction to the Chancellor's speech was muted. Sterling gained 0.68 pfennigs to DM2.4710 and the FT-SE 100 Index of leading UK shares advanced by 21.7 points to 2538.8.

Mr Lamont also disappointed some senior ministerial colleagues by ducking confrontation with the Thatcherites over Maastricht and the exchange rate mechanism.

That task will be left to John Major in this afternoon's conference finale - a speech intended to give the disunited party the smack of firm leadership and lay down the law on Maastricht. 'There will be no doubt who is leader of the party,' a party source said in a side-swipe at Baroness Thatcher, who had earlier split the conference down the middle when she joined the platform party for yesterday's debate. While half gave her the accustomed rapturous applause, the rest gave her the cold shoulder.

Mr Lamont directly challenged Lady Thatcher's hostile view of Maastricht at a Wednesday night fringe meeting, but he did not utter the word once in front of her and the full conference yesterday.

As for the exchange rate mechanism, he told the conference that 'we must not go back into the ERM unless and until it is right for Britain,' winning applause when he added: 'I know that does not make me very popular in Europe or in Brussels.'

But in a letter to a Commons select committee, setting out his economic policy in greater detail, he gave a much firmer message - dropping the implied suggestion that conditions for ERM re-entry might never be right. He told the MPs: 'The first point to clarify is whether and when sterling will return to the ERM. The Government has made clear its intention to resume Britain's membership of the ERM; but it will only do so when a number of conditions have been satisfied.'

Gordon Brown, Labour's shadow Chancellor, said Mr Lamont's speech did not contain 'one new initiative, proposal or policy . . . that will stop unemployment rising or business bankruptcies continuing. Britain is now the victim of a Government which has lost any sense of direction, purpose or strategy and which is more interested in appeasing factions in the Tory party.'

But of more significance for a party still reeling from Lady Thatcher's battle-cry over Maastricht, the Chancellor's speech held out little hope for the succession of conference speakers who told him that he was kicking business and industry in the teeth and bleeding them to death.

Mr Lamont said: 'Winning the battle against inflation. Tackling public spending. Getting the fundamentals right. Sticking to our guns. That's how we're going to restore confidence.'

The Chancellor is to give evidence to the Commons Treasury Select Committee on Monday, and in yesterday's letter he said that his inflation target - of 1-4 per cent over the next four years - would be based on the 'underlying' inflation measure.

That rate will be measured by the Retail Price Index with mortgage interest payments excluded, something that deadens the impact of interest rate rises. The Prime Minister's aim of zero inflation has been quietly forgotten.

While the August RPI was 3.6 per cent, the underlying rate was 4.2 per cent, and that could fall to within the Chancellor's new target range when September's figure is published this morning.

(Photograph omitted)

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