French Referendum: New policy for changes in the interest rate: Lamont defends policy

WASHINGTON - The Chancellor, Norman Lamont, yesterday revealed that Britain would use a number of monetary indicators, including house prices, to help decide future changes on interest rates. This means that a further fall in house prices over the winter may well be a signal for new cuts in interest rates.

The Chancellor was pressed by journalists to explain why he had not offered his resignation, in view of his vigorous defence of the European exchange rate mechanism (ERM) membership before the Government decided to suspend the pound's participation in the ERM. But Mr Lamont flatly refused to respond, saying he had 'dealt with' that question already.

With Britain's membership in the ERM suspended, Mr Lamont told the International Monetary Fund in Washington that 'our narrow money target will remain in place and we shall continue to monitor developments in broad money, asset prices, particularly house prices and of course the exchange rate itself.' Sources in Washington said the Treasury wants to avoid the mistakes made in the years before ERM membership by increasing the range of indicators which will guide monetary policy.

The Treasury feels it needs quickly to put in place a substitute for the ERM, even though it hopes that the policy will be temporary. The Chancellor said he would explain the new policy in more detail shortly.

Though still in its early stages, the plan links interest-rate policy to several new indicators which will include:

The present system of targets for the growth of 'narrow money' or M0, at the existing 0 to 4 per cent bands.

A new set of target bands for 'broad money', M4, which, unlike the past few years, will become an important guide to changes in monetary policy. Mr Lamont refused to say yesterday whether the bands would be published or not.

Movements in the prices of other assets, in particular house prices, but also including commercial property and share prices.

The exchange rate will be watched as an indicator of monetary tightness but there appears to be no precise target for the pound.

Nevertheless, Mr Lamont yesterday defended the old ERM central rate of 2.95 German marks on the grounds that British industrial exports to Europe were competitive at that rate. He also made it plain that now that Britain was outside the ERM, it was at least as important to hold back the budget deficit. To that end Mr Lamont reaffirmed the Government's recently announced New Control Total, which sets overall public spending for 1993-94 at pounds 244.5bn.

Speaking to reporters, Mr Lamont rejected recent suggestions that the Bank of England should be made independent of government control as an alternative anchor for anti-inflation policy. The success of the Bundesbank, which is independent of the Bonn government, was due more to public attitudes towards inflation than institutional arrangements. The Chancellor also hinted that Britain might use a future appreciation of the pound and sell sterling discreetly on the foreign exchanges to rebuild the reserves, which were last week roughly halved to dollars 25bn.

He said that Britain would 'take opportunities as and when they occur' to rebuild them.

The Chancellor also launched a defence of the ERM, saying that nothing he had said in the past few days was meant to imply that the system was called into question. It had brought 'very considerable benefit to the British economy' in the last two years and the new policy was intended to squeeze inflation further so that the gains of membership were not 'thrown away'.

However, the Chancellor indicated that the Government would like to see some reform of the system, notably that countries with strong currencies must be committed to market intervention in support of weaker currencies.

This is a clear reference to Germany's failure to support sterling last Wednesday.

Speaking to the IMF's policymaking group of finance ministers from industrial countries, Mr Lamont seemed to question the broader philosophy of the ERM as it now works. 'Is it to return to being a system of fixed but adjustable (currency) parities as it was in the 1980s? Or is it to be a glide- path towards a single currency?'

(Photograph omitted)