The Government has now dug itself so deeply into its entrenched 'no devaluation' position that there is scarcely a way out. Indeed, Mr Major actually went rather further than the Chancellor in his defence of present exchange rates; he implied that whatever other currencies within the ERM chose to devalue against the mark, sterling would stick to its present rate. That would appear to rule out even the option of a back-door devaluation under the guise of a general realignment of currencies. Sterling will keep up with the mark come what may.
It is still possible the Government will manage to muddle through without the need to raise interest rates. But it is much more likely that the Prime Minister is going to end up deeply regretting his words. The signs were there for all to see on Friday. Neither the dollar's strength nor Mr Major's brave words were enough to lift sterling off its ERM floor. Once the currency speculators have done their worst with the lira, they'll attack sterling again. I believe that whatever the outcome of the French vote on Maastricht, the Government is ultimately going to have to raise interest rates by 2 to 3 per cent to defend the pound. That's going to turn the economic desert spoken of by BTR last week into a veritable lunar landscape.Reuse content