Lamont gets a lift from inflation fall: Chancellor goes on the offensive against Thatcher and supporters of sterling's devaluation

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NORMAN LAMONT, the Chancellor of the Exchequer, signalled yesterday that the Government would no longer turn its cheek to Baroness Thatcher's criticism when he launched an aggressive rebuttal of recent attacks on the Government's economic policy.

Against the encouraging background of an unexpectedly sharp fall last month in the annual rate of inflation to 3.9 per cent, its lowest for eight months, Mr Lamont reminded the European Policy Forum in London that Lady Thatcher had decided that Britain should join the exchange rate mechanism when prime minister in 1990.

Mr Lamont, referring to her famous catchphrase of the 1979-81 recession, said that he would be the last person to say that there was no alternative: 'Plenty of alternatives are suggested. But in my view, they are all illusory or destined to fail. They would not deliver low inflation'.

Mr Lamont was particularly scathing about what is thought to be Lady Thatcher's preferred option - leaving the ERM. 'It's the cut and run option; cut interest rates and a run on the pound.

'As soon as the going gets rough, the quest begins for the easy way out. They cast around for a painless, cost-free route to higher growth with low inflation'.

The Chancellor dismissed the idea that interest rates could be cut substantially within the ERM as 'theoretically ingenious, but wholly unrealistic'. France had been forced to reverse a recent interest rate cut, he said, and investors would always want a premium for holding a currency like sterling rather than the German mark, which had never been devalued.

Mr Lamont also rejected the idea that the Germans would revalue the mark, as the French and others did not want to break their link with that currency.

But Mr Lamont reserved his most scathing comments for the third option - a devaluation of sterling alone, which would lower the bands within which it could vary against other currencies in the ERM. 'It is patently absurd to suggest that this would allow interest rate cuts'.

'When currencies devalue against the deutschemark the markets do not expect them to be revalued back up again. As I have said, that has never happened. They expect a further devaluation, and demand higher, not lower, interest rates in order to compensate for that risk.'

Finally, he cited the option of leaving the ERM and letting the pound float. 'Many who advocate floating know full well what the consequences would be. They intend a devaluation of the pound. And they would certainly achieve it. For the result of leaving the ERM, combined with large cuts in interest rates, would be a fall in the pound probably unprecedented in the last 40 years.'

'Whatever the position may be for other countries, we know from bitter experience that devaluation just does not work for Britain. If depreciating the currency solved anything, Britain would already have one of the most successful economies in the world.'

Mr Lamont warned that it would be disastrous to let up on inflation just because economic recovery was 'inevitably' going to be slow.

Mr Lamont described yesterday's offical inflation figures - down from 4.3 per cent in May - as an important milestone on the road to permanently low inflation. The Government's preferred measure of underlying inflation - excluding mortgage interest payments - fell from 5.3 to 4.8 per cent in the June, a four-year low.

But the Treasury remains concerned about stubbornly rapid price rises in the service sector, less subject to international competition and the discipline of the ERM than manufacturing.

City economists said they expected inflation to remain low, as price rises were restrained by the weakness of consumer spending. Economists at Lloyds Bank predicted that the slowdown in price rises could create scope for lower interest rates before the end of the year and that inflation could be well below 3 per cent by the end of 1993.

The Chancellor's colleagues accused Lady Thatcher and her supporters of duplicity in calling for a realignment of sterling, without admitting that meant devaluation. Her call for realignment was referred to incorrectly as revaluation in the Independent yesterday.

----------------------------------------------------------------- INFLATION IN SERVICES ----------------------------------------------------------------- Price increases over the past 12 months % Bank current account charges (NatWest) 20 Opera and ballet ticket (Royal Opera House) 11-12 Theatre ticket (RSC/Barbican) 10 School fees (Girls' Public Day Schools Trust) 9 Hairdressing (Vidal Sassoon) 8 Waxworks museum ticket (Madame Tussaud's) 8 Rail ticket (British Rail, average) 7.75 Cinema ticket (London West End) 6.7 Luxury hotel room (Savoy) 5 Retail Price Index 3.9 ----------------------------------------------------------------- Research: Katy Knight -----------------------------------------------------------------

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