EC rules out realignment of currencies

THE governments of the European Community declared yesterday that a realignment of currencies within the exchange rate mechanism would not be 'the appropriate response' to tensions within the system.

They also activated an agreement whereby the Bank of England will, in effect, have unlimited access to marks supplied by the Bundesbank which it can use to support the pound.

Normally, such open-ended credit is only available to currencies trading at their floor within the ERM.

The tensions in the system grew more widespread yesterday when the Bundesbank and the Bank of Italy intervened to prop up the lira as it fell to its floor. The mark gained ground to become the strongest currency in the ERM for the first time in several years.

The pound fell 0.2 pfennigs to DM2.7887, but fear of heavy central bank intervention provided support.

The Bank of England carried out some light intervention to remind the market that it could pounce again if necessary.

For the first time in two years the Bank refused to accept bids in the weekly tender of Treasury bills, thus signalling that it was not prepared to accommodate upward pressure on interest rates in the money markets.

Money market rates had shown some signs of easing, but were boosted towards the end of the day by rumours that the Bank of Italy would have to raise its interest rates to support the currency.

Steve Barrow, economist at Chemical Bank, said that intervention to support the lira had been 'quite significant'.

He added that the spread of tension to other currencies in the system helped to draw attention away from the difficulties of the pound, and emphasised that the strength of the mark was the principal cause of that tension.

The EC Monetary Committee said in a statement that the member states welcomed the activation of the 1987 Basle-Nyborg agreement, under which there is a presumption that the central banks of strong ERM currencies make available unlimited credit to support weak ones, even if not at the floor of the system.

'The authorities of the Community member countries are actively pursuing economic policy co-operation and stand ready to enforce their co-operation to ensure an appropriate functioning of the EMS,' it said.

The stock market had a quiet day, with the FT-SE index of 100 leading shares closing a point higher at 2,312.6.

Trading was subdued ahead of the bank holiday weekend. The Confederation of British Industry's monthly trends survey, showing growing pessimism among industrialists, was released too late to affect the market.