Britain's apparent determination to remain outside European Monetary Union until 2002 at the earliest is likely to result in a sharp fall in British share prices and renewed sterling strength on financial markets today. But confusion over policy, following reports that the Chancellor, Mr Gordon Brown, was prepared to rule out membership until after the next election, has raised fears of a stock market slide, 10 years and a day after £50 billion was wiped off share values on Black Monday. A nervous City of London, where the events of October 19th, 1987, are remembered with dread, could take the controversy as a signal to mark down shares.
There were various forecasts during the weekend of the extent of the fall-out from the Chancellor's comments and the subsequent uncertainty over the government's intentions. But currency dealers in Dublin expect sterling to move sharply higher against ERM currencies. One suggested that sterling might gain as much as five pfennigs against the German Dmark to DM 2.90.
On the domestic market it seems likely the pound will fall against sterling to well below 90p, while the pound's effective linkage with sterling is likely to see the Irish currency rise once again within the exchange rate mechanism.
Last Friday the pound closed just under 7 per cent above the weakest currency in the ERM, the French franc, and is now likely to rise further within the grid. Market sources believe, however, that the pound is unlikely to rise to anywhere near the 13 per cent above the franc reached some months ago, when the pound reached its highest point within the system.
The likely reaction in the markets can be gauged by the response to a Financial Times article three weeks ago which suggested that British cabinet members were edging towards early EMU entry. That comparatively vague article was sufficient to bring the London stock market's biggest one-day gain and a sharp fall in the value of sterling against the deutschmark.
That ecstatic market reaction was based on a belief that early EMU entry would result in a sharp fall in British interest rates. Now those investors who piled into British securities are facing heavy losses and may move to sell quickly.
One thing seems certain, however. If London falls sharply today share prices in Dublin will follow, with the major Irish financial shares suffering the brunt of any heavy selling.