Bank Governor backs open strategy

THE BANK of England could help to restore confidence in the Government's anti-inflation policies with a strategy of greater openness to Parliament and the public, the Bank's Governor, Robin Leigh-Pemberton, suggested yesterday.

His remarks came against a background of growing City disenchantment with Norman Lamont and some of his officials in the aftermath of the Chancellor's statement on his new anti-inflation strategy. Analysts made it clear there was mounting market concern at the prospect of trusting the judgement of what they increasingly believe is a discredited team. Nevertheless, markets reacted calmly to the Chancellor's speech.

The pound ended 0.68 pfennigs higher at DM2.4710 after hopes of an imminent cut in base rates faded, also underpinned by further evidence of easing market rates in Germany. Despite the continued recovery from Monday's record lows against the mark, currency analysts said the risk of sharp falls remained.

The FT-SE 100 index of leading shares ended 21.7 points higher at 2,538.8, but came off its highs on disappointment at the absence of interest rate cuts.

However, Mr Leigh-Pemberton's remarks may hearten the City because they imply that the Bank might be willing to act as a more public constraint on the Treasury than it has in the past.

Mr Lamont yesterday hinted at his acceptance of recent City criticism by emphasising the Bank's role in monetary policy. In his letter to the Commons Treasury Committee, he said the Treasury would work with the Bank in assessing monetary conditions. Development of new indicators would also be undertaken with the Bank.

Concern over the credibility of the Treasury team has grown now that the ERM anchor has been replaced with a greater reliance on the discretion and judgement of the Chancellor and his officials.

In his speech on monetary policy to businessmen yesterday, Mr Leigh-Pemberton said it was important that progress against inflation 'is not put in jeopardy'. The authorities would have to demonstrate that risks 'really will not be taken with inflation'.

He added: 'If this is accompanied by a willingness to be open in explaining, to Parliament and to the public at large, the influences on inflation and our response to them, that will, in my judgement, be the best way to restore confidence in the intentions of policy while we remain outside the ERM.'

The Governor's remarks suggested that the Bank would be more willing to interpret openly the Chancellor's new guidelines for monetary policy in appearances before the Commons Treasury Committee, in the Bank's Quarterly Bulletin, and in speeches.

Mr Lamont yesterday set an unprecedented target for the underlying inflation rate - the retail price index excluding mortgage interest rates - of 1 to 4 per cent, with the aim of reaching the lower end of the range by the mid-1990s. The rate would be allowed temporarily to breach the ceiling only if driven up by events outside the Government's control, such as a rise in commodity prices. Among other industrial countries only Canada and New Zealand have explicit inflation targets.

Official figures out today are expected to show that underlying inflation in September slipped to 4 from 4.2 per cent in August. The Government's long-term goal is an underlying rate of 2 per cent - an objective shared by the German Bundesbank. The rate sank to a post-war low of 3.1 per cent in 1986 when oil prices collapsed.

Although the inflation target is paramount, Mr Lamont said he would also rely on a series of other indicators, including the exchange rate. Ruling out an explicit target for sterling, he said policy would be influenced by whether a movement in the pound's value against a weighted basket of currencies, or against a particular level sustained 'for a period', would jeopardise the inflation target. Yesterday, the index closed unchanged at 82 per cent of sterling's 1985 value.

The Treasury will retain the current target for M0, narrow money supply, of 0-4 per cent and will set a monitoring range for broad money supply, M4, in the Autumn Statement next month.

Hamish MacRae, page 23

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