THE Government was last night facing a crucial week in which it has to

persuade the markets and the country that it has a credible economic

policy.

Chancellor Norman Lamont will attempt to offset deepening gloom in

manufacturing industry by promising policies for growth in his Mansion

House speech to City bankers at London's Guildhall.

The Prime Minister drove that message home yesterday with a pledge

that more interest rate cuts would follow ''when prudent''.

Even that, however, was too little to satisfy the growing band of

sceptics inside the Tory Party. Former party chairman Kenneth Baker

publicly called for a cut in interest rates from 8% to about 4%.

On Thursday, Mr Lamont will have to convince an audience which will

pick over his every word that he is in control of the economy and can

lead the country out of recession.

His reputation has taken a battering in recent weeks with the collapse

of the value of the pound and the ignominious withdrawal from the

European exchange rate mechanism.

Mr Major said on BBC Radio 4's The World this Weekend programme: ''The

consistent cry from homeowners and from businessmen has been to get

interest rates down.

''Every 1% off interest rates is worth #1 billion to industry. Every

1% off interest rates means more money in the pockets of people with

mortgages to spend in the high streets.

''So we do not want to imperil the fact that we have been able to get

interest rates down and will look, when it is prudent to do so, for

further reductions.''

However, a survey by the Confederation of British Industry this week

is expected to show a sharp fall in business optimism.

The City is anxious to see what methods the Government will employ to

handle the economy since the discipline of the ERM evaporated on ''Black

Wednesday''.

Mr Lamont is expected to

expand on the Government's methods for guiding the economy as he

outlines his new strategy for growth.

He faces an uphill battle, however, in convincing doubtful markets

that economic policy -- although greatly changed -- is back on course.

Mr Baker told LWT's News Weekend that the Government must come forward

with a new economic package to restore confidence and boost recovery.

''The fact that the pound is now floating is something I welcome. When

we came out of the ERM, I called for 8% interest rates and I was called

irresponsible,'' he said.

''When interest rates got down to 8%, I urged 6% and was again called

irresponsible -- but now we're heading for 6%.

''I think we should be below that, possibly 5 or 4%.''

Large construction projects must not be cut in the public spending

squeeze and if the Government felt it could not afford them it should

work in partnership with the private sector, he said.

Environment Secretary Michael Howard stressed that low inflation and

low interest rates were still the Government's aim.

''We want to get interest rates down as much as possible. We don't

want to pursue policies which might in the short term be job creating

but would put interest rates up and do more damage to jobs than anything

else,'' he said on BBC TV's On the Record programme.

He said there were already signs of an export-led recovery, which he

believed would lead Britain out of recession.

He also outlined the severity of the coming public spending squeeze by

hinting that one of the areas which could suffer is the #2 billion

earmarked to help ease in the council tax.