Commentary: Lamont's soundbite was expensive

The Chancellor's statement on the steps of the Treasury this morning may go down as one of the more expensive pieces of verbiage in British monetary history.

Far from being reassured by Norman Lamont's reiteration of government policy - there will be no devaluation and he will take whatever measures are necessary to defend the pound - the markets chose to count their spoons instead. They endowed him with as much credibility as, say, George Bush ('Read my lips. No new taxes.') or Harold Wilson ('There will be no devaluation of the pound').

City sceptics think that a good slice of the pounds 500m of foreign currency thrown into the market to buy up pounds went to offset the impact of an ill-advised 'controlled soundbite' that involved the Chancellor popping in and out of the Treasury with the decorum of a cuckoo clock. The performance underlined to the markets the questions Mr Lamont left unanswered: will he refuse to devalue even if the French vote against the Maastricht treaty on 20 September, as another opinion poll suggested yesterday? (The answer - from his spokesman - is that he will).

Despite the unusual decision by the Bank of England to stand in the market buying up all the sterling that anyone was prepared to offer, the pound managed to rally only 1 pfennig. It was then Mr Lamont's bad luck that a rogue Bundesbank council member was quoted as contemplating an ERM realignment, thus hinting at the German mark revaluation on which the speculators have been betting all week. The pound managed only a half-pfennig gain on the day.

Another gauge of the markets' growing scepticism is the price of government bonds - 'gilts'. Yesterday's auction of long-maturity bonds, mainly of interest to UK institutions, was disappointing. Just as significant is the continuing move in the price of the 10-year bonds more attractive to foreigners. Their yields have now risen to 9.4 per cent from a post- election low of 8.9 per cent: the premium investors require to compensate for the risk of capital losses if sterling devalues is going up.

This Chancellor would be well advised to buy pounds as heavily as he needs to hold the rate. The sheer scale of the foreign exchange markets can in principle overwhelm any likely intervention: at the time of the last survey in 1989, London's daily turnover was dollars 187bn. But it is the trade at the margin that affects the price, and dollars 45.7bn of foreign currency reserves is not negligible.

These are precisely the circumstances - a period of temporary political uncertainty - in which it is appropriate to use the reserves rather than any more fundamental change of policy.