Lamont faces restive builders and German jitters

PRESSURE for a change in government economic policy intensified yesterday as 24 of Britain's largest housebuilders wrote to Norman Lamont, the Chancellor, warning that lack of confidence in the housing market could turn the recession into a slump.

The letter, signed by the heads of companies including Barratt Developments, Alfred McAlpine Homes, Taylor Woodrow Homes and Bovis Homes, says: 'The housing market must recover if retail spending is to increase and the savings ratio is to fall.' And it warns that confidence is being undermined by the Government's pursuit of zero inflation.

Falling house prices are already encouraging houseowners to rebuild their capital rather than spending, it says, which means the 'problem of deflation requires to be urgently addressed'. The builders express their disappointment at the decision to reintroduce stamp duty on housing next month, and urge the Chancellor to make clear how he intends to restore confidence in the economy.

Meanwhile, the financial markets remained in jittery mood ahead of today's Bundesbank council meeting, at which it is feared the German central bank will decide to tighten monetary policy, threatening higher interest rates in Britain and elsewhere in Europe.

Fears of tighter policy have been fuelled by money supply growth in Germany growing well above its target rate. Disagreement over the threat of German inflation has led to passionate disagreement in the Bundesbank's policy- making council over how to respond.

Market nervousness was compounded by the announcement that the Bundesbank is planning a press conference after today's meeting, although this is not an infallible indicator of a policy change.

The money markets reflected the danger that base rates might have to rise in Britain, with the three-month interbank lending rate - which tracks City base rate expectations - rising 1 16 of a percentage point to 103 16 . This almost fully discounts a quarter-point rise in base rates to 10.25 per cent. The pound slipped by 0.42 pfennigs to DM2.8450 and gained a cent to dollars 1.9245.

An influential lobby on the 28-strong Bundesbank council, drawn mainly from heads of the state central banks, favours drastic action and is pushing for an increase in the leading Lombard rate from its record high of 9.75 per cent, for reasons which go beyond curbing inflationary potential in Germany.

This lobby is strongly opposed to the Maastricht agreements on European monetary union. Perversely, the lobby's members are lent some support by a few of the strongly pro-European members, who believe it essential that the Bundesbank reinforce its image as an independent, anti-inflationary crusader.

Those Bundebank council members who are taking a softer line consider raising the discount rate from 8 per cent, and introducing quotas on liquidity drawn by commercial banks, sufficient action.

The dollar shed slightly more than a pfennig yesterday to close at DM1.4780. It was little moved by Federal Reserve figures showing that US industrial output fell in May for the first time in five months. However, the 0.3 per cent decline was less steep than Wall Street economists feared.

Neil Kinnock last night put Labour pressure on the Government to persuade Germany to revalue the mark upwards rather than increase interest rates. Such a move would allow a general EC devaluation, writes Nicholas Timmins.

In a letter to the Financial Times he said he could make that proposal because his words would no longer be treated as Labour Party policy. But given that John Smith, who takes over as Labour leader on Saturday, is known to believe a general realignment is inevitable at some point, Mr Kinnock's argument may still signal a shift in Labour's stance.

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