Meanwhile, the threat of a general rise in European interest rates also receded as the world's leading central banks joined forces in an aggressive attempt to halt the precipitous slide in the dollar, pound and stock markets.
The National Savings bond, known as First Option, had swept in pounds 112m in 10 days, mostly from building societies. Its success had prompted Cheltenham & Gloucester, to raise savings rates to attract investors back.
The society's accompanying 0.24 per cent rise in its mortgage rate had fuelled fears that other societies and banks would follow, further delaying recovery in the housing market and the economy.
The Government offered the bond to help to fund the budget deficit, which has ballooned under the weight of recession.
Despite the Treasury's cut in the bond's yield, Alliance & Leicester, the third largest society, said it might still follow Cheltenham & Gloucester's lead. Halifax, the largest society, said the reduction did not solve the problems of competition faced by the societies.
However the Cheltenham & Gloucester said last night that it might drop its rates and hoped to make an announcement before the end of the week.
In three waves of surprise intervention designed to inflict heavy losses on currency speculators who had sold dollars, central banks bought hundreds of millions of dollars. Catching the markets off guard, they forced up the dollar against other leading currencies.
The rising dollar pulled the pound up with it after sterling had plunged to an all-time low of DM2.8275 in the European exchange rate mechanism (ERM). The pound's problems had triggered a steep decline on the London stock market, which had also been driven lower by big falls in New York, Tokyo, and Frankfurt yesterday and late last week.
Central bank intervention helped sterling to end the day at DM2.8382, a loss of just one pfennig on Friday's close and well above the ERM floor of DM2.78. The pound's improved tone extinguished, for the time being, fears that the Government would be forced to raise interest rates had its slide continued unchecked.
Fears of higher rates in Britain had been set off by last week's increase in German interest rates. Yesterday's central bank action appeared to be aimed at restoring confidence in the increasingly parlous financial system, which began to unravel after the recent Group of Seven world economic summit in Munich failed to come up with measures to reverse the faltering international recovery.
In two aggressive rounds of intervention, most European central banks, including the Bank of England and Germany's Bundesbank, co-ordinated their efforts with the US Federal Reserve to buy the dollar. After European markets closed the Fed kept up the pressure in New York.
Against the pound, the dollar jumped by 3.6 cents to stand at dollars 1.9155 while the FT-SE 100 Index of leading UK shares finished 28.2 points down, at 2403.7, after slumping nearly 65 points earlier in the day. The dollar gained
2.43 pfennigs to end at DM1.4840, after threatening to breach an all-time low of DM1.4430.
Standing firm against calls for Britain to leave the ERM or devalue the pound and pave the way for lower rates, John Major yesterday rejected the risks of a 'roulette' economy in which business was forced to gamble on a turn of the inflationary wheel.
In a speech to an Aims of Industry prize-giving, the Prime Minister denounced policies of hand-out and bail-out, and repudiated the idea 'that with a bit of tweaking of the money supply here, a little fine-tuning of interest rates there, a little bit of spending somewhere else, everything will come out all right, and then, if all else fails, a massive devaluation to bail us out of our mistakes and to solve our problems'.
Margaret Beckett, Labour's new deputy leader, told Radio 4's World at One that if necessary the Government should cut interest rates unilaterally, but when it was pointed out that sterling was at the bottom of its ERM band, she added: 'Today may not be the day.'
Earlier, Michael Portillo, Chief Secretary to the Treasury, described as 'speculation' yesterday's Independent report that ministers were considering taxation of child benefits. He said it had not been considered, but added: 'It isn't up to me to say what will be considered because I am not the Chancellor.'Reuse content