Commentary: Enough of the injured innocence

Those popular newspapers that have been berating the Chancellor for planning a restful summer in Buckinghamshire, Chiantishire and other home counties must have been surprised at the life in the old dog. With money continuing to flood into National Savings - pounds 2.1bn in the first four months of this financial year, compared with pounds 3.1bn in the whole of 1991-2 - Norman Lamont has decided to ease the pressure on other high street savings institutions, cutting the principal NS rate for the second time this year.

The Treasury roundly denies that the NS rate cut from 8 per cent to 7.5 per cent has anything to do with the desire to head off a mortgage rate rise; it was merely a reaction to large inflows. But there are too many smoking guns to take the injured innocence very seriously. This week's barrage of housing rescue plans from Abbey National, Woolwich and National Westminster are beginning to create waves. The market needs a gradual rise in mortgage rates, as building societies raise deposit rates to compete with National Savings, like a hole in the head.

Indeed, what the market really needs is an interest rate cut, which awaits the pleasure of the Bundesbank council since British rates are unlikely to be cut below German ones while we remain in the exchange rate mechanism. There is no press conference scheduled for tomorrow's council, which is a fair hint that no rise is planned. There is even an influential school of thought in Frankfurt that the council could cut interest rates much sooner than the market expects, perhaps as early as next month.

There has been a debate in Frankfurt about exactly how quickly the economy has really been slowing down. The raw numbers for the second quarter have suggested the beginning of a clear recession, but many of them have been distorted by strikes and holidays. However, the council ought to be impressed by yesterday's rise in seasonally adjusted unemployment, and by the mounting evidence that the reasons why money supply is overshooting its 3.5 per cent to 5.5 per cent target have little to do with spending.

The increase in value-added tax, with another rise planned for the new year, raises the price level but does not necessarily raise inflation - the rise in prices each year. The same applies to decontrolled and rising rents in the former East Germany, which are a once-off phenomenon. The mark is in demand throughout Eastern Europe as a convenient hard currency, but also within the old East Germany itself as a luxury good. All in all, the case for a modest easing on purely German grounds is becoming stronger. From the Chancellor's point of view, it is none too soon.