The continuing slide of the pound put further pressure on the Government on the eve of the Conservative Party Conference in Brighton. But John Major, the Prime Minister, yesterday urged his party not to get 'unduly panicked' about turbulence in the exchange markets.
Mounting alarm at the absence of a coherent economic strategy since sterling was forced out of the exchange rate mechanism sent the pound crashing more than 6 pfennigs yesterday, while London shares dropped by more than 100 points to wipe almost pounds 20bn off share values.
Uncertainty about sterling could force Norman Lamont, the Chancellor of the Exchequer, to set out his economic and monetary policy in his speech on Thursday. He had intended to wait until an appearance before a Parliamentary Committee next Monday or even until his 29 October speech to the City.
Despite Hanson's bid for Ranks Hovis McDougall, the first for months, the FT-SE 100 Index of leading UK shares ended 103.4 lower, at 2446.3.
Although the pound again threatened to free-fall, there was a modest technical recovery at the close. But sentiment remained grim. In London, sterling ended 4.36 pfennigs down at a record closing low of DM2.3916.
The Treasury warned that the exchange rate still mattered and Norman Lamont would not hesitate to raise rates if he felt the fight against inflation was being undermined. But yesterday there was little indication that the money markets were expecting an increase in base rates.
The falling pound forced the Cabinet to consider cutting pension increases. The Treasury has provoked a Cabinet battle by demanding that the index-link with pensions should be broken. That would require an emergency Bill. Ministers are also considering cutting or freezing income support, which is not protected by law.
At a dinner last night, Mr Major told party agents the Government remained committed to low inflation and low taxation. That was intended as an assurance that it will not raise taxes to find a way out of the crisis, but party officials said it was not a 'blanket promise'.
The falling pound will intensify the pressure to take unpopular decisions in cutting public spending, including a freeze on public sector pay. Ministers are not ruling out increasing interest rates.
Downing Street has revealed that EC finance ministers will not now attend the 16 October summit of Community leaders on the Maastricht Treaty.
The decision means Britain does not intend to press for ERM reforms at present, but it also suggests a desire to avoid discord among finance ministers, which might cause further turbulence on financial markets.
The Government's growing isolation from its natural allies was compounded yesterday by Howard Davies, director general of the Confederation of British Industry, who delivered his sharpest attack on Whitehall. Ministerial hints of public spending cuts amounted to 'dancing in the dark', by making public spending decisions without any policy for economic growth. 'It is a case of decibel planning: he who shouts the loudest gets most.'Reuse content