LONDON -- Britain announced yesterday that the pound will join the European Exchange Rate Mechanism Monday, tying sterling into a tighter relationship with major continental currencies.
Prime Minister Margaret Thatcher, who during her 11 years in office has resisted pressure to link the pound to the mechanism, said yesterday that the time was "right."
At the same time, Chancellor of the Exchequer John Major reduced the base, or prime, interest rate to 14 percent from 15 percent, easing a yearlong squeeze on spending.
The announcement ended months of speculation in the financial markets about the timing of the pound's entry into the exchange mechanism and weeks of complaints from business that record high interest rates were strangling investment.
The result was an immediate surge on the London Stock Exchange, which extended business for an hour. The Stock Exchange-Financial Times Index of 100 leading shares ended the day 73.5 points higher at 2413.9, adding $33 million to stock values.
The pound also soared, closing up 5 cents against the dollar at $1.96 and up 3 pfennigs against the German mark at 3.02 marks. It formally entered the exchange mechanism at 2.95 marks.
Opposition politicians accused the government of playing politics, making the surprise announcement on the final day of the Labor Party conference and on the eve of next week's ruling Conservative Party conference.
Most currencies in the exchange mechanism are tied to a 2.25 percent variation either way against the values of other European currencies in the system.
But the pound, like the Spanish peseta, will be held to a wider range of 6 per cent up or down. If it threatens to fluctuate more than that, European central banks will be required to help the Bank of England bring it back under control by buying or selling the currency.