Italy lifts rates of interest

ITALY SOUGHT yesterday to underpin confidence in the lira by increasing its interest rate and announcing plans for spending cuts, writes Andrew Marshall.

The decision shows that with growth slipping and budget deficits soaring in several Group of Seven industrial countries, co-ordination of economic policy - historically the main activity of meetings such as the one opening today in Munich - is increasingly difficult.

The Bank of Italy said it was increasing its main lending rate, the discount rate, by a full percentage point to 13 per cent today. The bank said that the increase was to counteract pressure on the currency, which fell to near-record lows against the Deutschmark last week, prompting fears that there might be a shift in European Monetary System. There had been speculation that Italy would have to devalue.

Giuliano Amato, the new Prime Minister, said the government was freezing public sector prices and would complete a package of spending cuts and tax increases by the end of this week to cut 30 trillion lire ( pounds 14bn) from the budget deficit. The deficit is set to hit 160 trillion lire in 1992. But even at 145 trillion lire the deficit would still be above the original target of 128 trillion lire.

The government said it would seek parliamentary approval for four special laws giving it power to reform pensions, health, local government and public sector employment - all prime elements in the deficit.