The Bank used almost pounds 500m of Britain's foreign currency reserves to buy sterling during the morning, rapidly lifting the pound a pfennig higher to about DM2.8050. It openly bought sterling in the markets, rather than obscuring its operations through third parties.
The City was less impressed by Norman Lamont's contribution to sterling's defence - a statement issued as the currency markets opened yesterday. 'There are going to be no devaluations, no leaving the ERM. We are absolutely committed to the ERM. That is our policy, it is at the centre of our policy,' he said.
The threat that the Government would have to announce an imminent interest rate rise eased only slightly in the money markets. They still assume that there will be a half-point rise in the base rate from 10 per cent.
The markets were disappointed that what was flagged as an important statement from the Chancellor was merely a rehash of existing policy.
'He was not particularly well advised to make that statement. It was heralded with slightly unnecessary drama', said Gavyn Davies, economist at Goldman Sachs.
Then, to the consternation of the Bank and the Treasury, the pound's gains from intervention were more than wiped out by a surge in the mark. This followed the release of a planned speech by Professor Reimut Jochimsen, a German Bundesbank council member, arguing that the potential for a realignment of currencies within the exchange rate mechanism 'had been repressed for many years for prestige reasons'.
Financial markets interpreted that as the first public indication that the Bundesbank now accepts the need for an realignment in the exchange rate mechanism, which would allow non-German currencies to fall further against the mark.
The report led to demands for clarification from other EC capitals, prompting quick work in Frankfurt to excise the offending sentence. When Professor Jochimsen delivered the speech several hours later, 'there was no mention of realignment', noted a Bundesbank spokesman. He said that the Bundesbank's policy remained that 'it is not asking for a realignment'.
The Bundesbank's clarification helped the pound during the afternoon, as did a stronger dollar. Sterling closed 0.51 pfennigs up on Tuesday's close at DM2.7935, the first daily gain for a week. The Italian lira remained under pressure, hitting its floor against the strongest ERM currency, the Belgian franc.
The pound also managed to shake off a second poll in as many days showing a majority of French voters opposed to the Maastricht treaty on European union. The survey, conducted by the IPSOS organisation for Le Point magazine, recorded 52 per cent of decided voters saying 'no' and 48 per cent 'yes'.
The stock market took comfort from the higher pound and a firm start on Wall Street. The FTSE index of 100 leading shares rose 4 points to 2285. An auction of government bonds also received a disappointing response.
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