Warning from Bank of England causes concern for Irish firms

The pound eased slightly against sterling as a Bank of England adviser warned that sterling could become even more volatile after monetary union.

In a quiet day on the Dublin market, the pound dropped to 84.30p against sterling from 84.60p on Monday. It traded as low as 83.30p during the day. At the same time, it gained almost a pfennig against the deutschmark to close at DM2.5027 from DM2.4909.

Mr Jim Power, chief economist at Bank of Ireland, said the pound simply followed sterling up against the deutschmark. Sterling had another day of strong flows from Asian markets, he noted. It also gained strength from a study reporting a 4.8 per cent jump in UK retail sales in December compared with the same month in 1996.

Sterling also benefited from UK inflation figures, with the annual rate standing at 2.7 per cent excluding mortgage payments.

It now appears that there is "definite resistance" for the pound at about DM2.48 where many speculators have been taking profits after the most recent sell-off and ahead of the informal meeting of EU finance ministers this weekend.

However, many Irish firms will not be encouraged by a warning from Prof Charles Goodhart, a leading academic and member of the Bank of England's monetary policy committee.

He warned that sterling will be a popular alternative to the euro for many international speculators. "One way to diversify holding after 1999 is to hold dollars or sterling so you could argue that if the UK stays out, the exchange rate will be even more variable than it has been," he said. He added that this would be particularly unwelcome for manufacturers.

Prof Goodhart also said that sterling's rally is not principally due to recent increases in interest rates. Sterling has appreciated by 23 per cent on a trade-weighted basis since August 1996. He insisted that, according to Bank of England research, interest rates accounted for less than a quarter of these gains.

One reason, according to Bank of Ireland's Mr Power, is the massive currency flows from Asia into so-called "safe haven" currencies like the dollar and sterling.

"So long as the Asian crisis continues we will not see any significant decline in sterling," he said.

Yesterday, this appeared to be true. Prof Goodhart, who votes on the level of interest rates at the UK's monetary policy committee's monthly meetings, warned that the Asian crisis will limit future interest rate rises.

"This is a factor which makes it likely the extent of rate increases will be less than it otherwise would have been," he said. But sterling failed to react.