British banks yesterday raised their base lending rate by 2 percentage points to 14 percent, as continuing worries over oil prices exerted downward pressure on the pound.
The action -- the third interest rate hike in 1985 -- pushed interest rates in Britain to their highest level in three years.
Barclays Bank took the lead in London, raising its base rate to 14 percent. It was quickly followed by Lloyds, National Westminster and Midland, Britain's other major banks.
Just two weeks ago, the banks had raised their base rates by 1 1/2 percentage points to 12 percent to prop up the flagging pound. In European markets yesterday, sterling slumped to a European low of $1.1060 on glum oil news, but recovered slightly after the base-rate rise.
On the London stock market yesterday, nearly $4.6 billion was wiped off share values before the base rate announcement, and the Financial Times Top Thirty index was down more than 30 points at 970.
Fears that oil prices might plunge further and that a coal miners strike might not be resolved quickly added to widespread concern yesterday that the British government's economic policy is off course.
Market analysts speculated that Chancellor of the Exchequer Nigel Lawson may ask his counterparts in the United States and Europe to help Britain support sterling on the foreign exchange markets.
The speculation followed remarks by Lawson that sterling was undervalued against the dollar and that the dollar also was overvalued against other currencies.
The new base lending rate of 14 percent was seen by many as crippling for industry and politically damaging for the Thatcher government, which is failing to reduce unemployment.
Interest rates started to go up two weeks ago because international currency speculators became convinced that Prime Minister Margaret Thatcher and Lawson did not care how low the pound sank.
Sterling was buffeted again on world foreign exchange markets, and currency dealers said the pound's gyrations were largely influenced by the rocky meeting in Geneva of members the Organization of Petroleum Exporting Countries.
Early yesterday, when the oil minister of the United Arab Emirates walked out of the meeting in a dispute with Nigeria, raising fears in financial markets that a collapse of the cartel was imminent, the pound slumped to a European trading low of $1.1060.
The pound is tied closely to oil prices because of Britain's reliance on North Sea oil reserves.
But the pound recovered after the banks raised their lending rates. And later, the pound gained more ground as OPEC resumed its discussions.
By the end of trading in London, the pound stood at $1.1110, still a record closing low in Europe and down from $1.1135 Friday.
Later in the United States, sterling recovered to $1.1169 from Friday's late rate of $1.10775.