Pound rises over 86p as market offloads sterling

The pound has continued to rise against sterling, closing at more than 86p as the British currency dropped due to heavy selling pressure.

The sustained rise in the Irish currency against sterling will ease fears that rising import prices will put upward pressure on inflation. But new Central Bank figures showed that borrowing from banks and building societies in March was still running almost 25 per cent ahead of last year. As credit growth is another inflationary indicator, the bank is unlikely to be persuaded by the currency markets to significantly cut interest rates in the short term.

Across Europe, the deutschmark and the Swiss franc gained strongly, as dealers looked for "safe havens" or countries likely to raise interest rates in the short term. Traders said it was a frantic day, as seller after seller of sterling emerged. On the Irish market, businesses bought substantial amounts of pounds.

According to Mr Jim Power, chief economist at Bank of Ireland, there has been a fundamental reassessment of the German currency, as sterling has lost its status as a safe haven currency. "The markets are adopting a very positive approach to the euro and now believe it will be a credible currency. The Bundesbank will not tolerate any further weakening of the mark and if that necessitates higher rates, so be it," he said.

Many analysts are also anticipating a substantial decline in German unemployment and expect the mark to respond very positively to the release of job figures today.

The Bank of England's decision earlier this week - although expected - to leave its key interest rate unchanged at 7.25 per cent, strengthened perceptions that British interest rates have no further to rise.

Many analysts are now expecting lower British rates, if not by the end of this year then certainly early next year. In Dublin, the pound closed at 86.3p against sterling, from 85.7p a day earlier.

At the same time data published by the Central Bank showed that underlying credit growth was running at 24.6 per cent at the end of March, from 26 per cent in February. Residential mortgage lending was up 20.7 per cent year on year in March, from 20.6 per cent in the previous two months.

Mr Power said the continuing high level of borrowing in the economy will underline the Central Bank's resolve to hold off on interest rate cuts for as long as possible.

The Bank will also find solace that Bundesbank President, Mr Hans Tietmeyer, said yesterday that interest rate convergence need not start immediately.