THE GOVERNMENT last night suspended Britain╒s membership of the Exchange Rate Mechanism after a tidal wave of selling the pound on the foreign exchanges left it defenceless against international currency speculators.
Britain╒s decision pushed the ERM to the brink of collapse early today, with the EC monetary committee locked in crisis talks aimed at holding the system together.
The Chancellor, Norman Lamont, announced that the Government could no longer hold the line at the end of a day of desperate and futile attempts at propping up sterling, which included spending what the City estimated as ú10bn from Britain╒s reserves and a two-stage rise in interest rates to 15 per cent.
The announcement sent sterling tumbling in New York trading last night, hitting DM2.69 ╤ nine pfennigs below its former permitted ERM floor against the mark.
In Tokyo today, sterling dropped to DM2.6680 in hectic trading within minutes of the markets opening. Market sources said dealers were taking their lead from New York where the pound weakened substantially after the day╒s events in London. Investors were also switching into a strengthened dollar which saw the sterling rate against the US currency drop to as low as $1.75 ╤ eight cents lower than the price quoted at the close in London.
The decision to suspend membership of the ERM represents a humiliating reversal for the Chancellor and the Prime Minister, who have staked enormous credibility on being able to resist devaluation. Britain joined the ERM less than two years ago, and until last night╒s decision, membership has been the centrepiece of the Government╒s anti-inflation strategy.
However, the U-turn was tacit recognition of the awesome risks of precipitating a slump by inflicting base rates of 15 per cent or higher on an economy that is already deep in recession.
Treasury sources said last night the Government intended to rejoin the ERM eventually. However, it was far too early to say when.
Mr Lamont said in his statement outside the Treasury at 7.40 last night: ╥I have tonight called an urgent meeting of the EC╒s monetary committee to consider how stability might be restored to the markets over the next few days.
╥In the meantime the Government has decided that Britain╒s best interests would be best secured by suspending our membership of the ERM with immediate effect.╙
Mr Lamont╒s dramatic statement followed an unprecedented day of financial turmoil. Massive selling of the pound forced the Bank of England to raise rates to 12 per cent then 15 per cent until the second rise was revoked and sterling suspended from the ERM after the pressure continued unabated.
The Bank╒s emergency measures came after record intervention in the foreign exchanges to defend sterling╒s parity was brushed aside by dealers scenting blood.
In total, the City believed that 40 per cent of Britain╒s foreign exchange reserves were spent in frenetic trading. There were reports that the morning began with senior Bank of England officials clashing with Mr Major and Mr Lamont over the Government╒s insistence on wasting the reserves on what the Bank expected to be a lost cause.
