The fact that the German contingent had made an on-the-record commitment not to increase German interest rates 'in present circumstances', even if they showed no sign of cutting them either, was seen as a significant development.
Bond and equity markets will have less to fear from matching interest rate increases in beleaguered European economies. Henning Christopherson, the EC finance commissioner, warned at the weekend that EC growth may be only 1.2 per cent this year, compared with his June forecast of 1.7 per cent, and 1.5 per cent in 1993.
But analysts noted that ministers outside Germany made no commitment to holding interest rates at current levels. This implied that defence of current ERM parity limits would rely heavily on central bank intervention.
The meeting committed the Twelve to lower interest rates, but only 'insofar as the disinflationary process allows it,' a phrase almost certainly inserted at the insistence of the Germans.
Ministers tried to put over the message that this meant the next move in German rates would be down. 'The outlook is for lower interest rates. The Bundesbank is no longer in a frame of mind to raise rates,' Michel Sapin, the French finance minister, said.
But Helmut Schlesinger, the Bundesbank president, said afterwards: 'As long as monetary expansion is as powerful as it is now . . . and as long as there is no clear reduction in inflationary tensions . . . we have no room to reduce our own leading interest rates.'
Gerald Holtham, international economist at Shearson Lehman Brothers, said that financial markets would take 'rather little comfort' from Bath.
'In present circumstances' was the 'weasel' phrase, he said, and no one should doubt that the Bundesbank would do what it had to do if money supply growth and inflation were too high.
Last week's UK borrowing package 'just left the lira in the firing line'. He did not think the Italian government would give up and devalue before the 20th. Officials know that in the absence of confidence in the policy framework around the currencies, nothing will prevent dealers from selling the pound and the lira. Intense pressure came last week as money flooded out of the dollar into the mark. The only other line of defence, without realigning the currencies in the EMS, is to raise interest rates. Mr Lamont pledged that he would do that if needed.
The Bank of England and the Treasury have now put together a package which includes the Bath statement, last week's borrowing and concerted intervention. At the weekend, ministers also gave strong political backing to the Italian government's most recent package of economic reforms, which may help the lira.
But the Bank of England knows that all the reserves in the world will not be enough to stop currencies falling if dealers are not convinced that the framework of policies is correct. Officials believe the market understands that an interest rate rise would worsen the situation, as it would bring a hail of criticism down on Mr Lamont, and add to pressure for Britain to leave the EMS.
It is important for both the Bank and the Treasury, however, to convince markets that devaluation - through a realignment of the EMS - is not an option. If the markets sense a realignment is on the cards, the the pound and the lira will drop through the floor.Reuse content