Central Bank lets short-term rates rise

THE Central Bank has allowed short term interest rates to edge higher on the Dublin money market in a move believed to indicate its desire to see the pound trade higher against sterling.

Analysts do not think this indicates nearly move to higher interest rates for borrowers, although it is the first negative signal for Irish rates in recent months. As well as trying to support the pound against sterling, the Bank may be preparing the markets for a stronger than expected monthly borrowing figure today.

Through its operations in the Dublin, money market, the Bank has appeared content to see interest rates remain at a low level. However, by managing the flow of liquidity to the market yesterday, it allowed short term rates to edge one sixteenth of a percentage point higher, with one month rates closing last night at 5 and three sixteenths.

Commenting on the move, Mr Jim Power chief economist at Blank of Ireland Treasury said it was difficult to see any other motivation for the move apart from a desire to protect the pound from falling further against sterling. "There is talk that the Bank may be preparing us for a high credit number tomorrow," he said.

However the pound only gained marginally against sterling, closing at 102.37p from 102.33p a day earlier, as the British currency was hit by profit taking.

The pound held its own against the deutschmark and other European currencies.

Traders are saying the pound may remain below 103p over the medium term. Forecasts until last week had been for 104p or even 105p in the medium term.

"It looks as if the market has taken a labour victory in the British election on board," one trader said. "Their message of fiscal rectitude seems to have finally got across. In any case nothing could be worse than the current disaster prone crowd."

Dr Dan McLaughlin, chief economist at Riada Stockbrokers, expects the pound to trade between 102p and 103p over the next few months. "The Central Bank wouldn't mind helping us to stay above 102p with inflation being a concern," he said. A stronger currency should dampen inflation, he added.

It was "marginally more attractive" to hold the pound over sterling after yesterday's rise in short term rates, he said.

Today's credit figures are expected to show an 11.3 per cent rise in credit in April. However, a figure between 11.5 and 12 per cent might worry the Central Bank.

The decline was not enough for the Irish Exporters Association. Its chief executive, Mr Colum MacDonnell, said the adjustment was "minor" and the rate still posed problems for exporters. The association called on the Government to reassess the British market and to examine the profits it received from state promotional agencies.

The association has advised exporters to actively manage their exposure. "Exporters could sell forward on a three month basis at, 102.70p which could be attractive," Mr MacDonnell noted.

The association released the results of a survey of the impact of the sterling exchange rate on exporters.

It fund that a weakened sterling had caused some slowing down in exports to Britain as well as declining profit ratios among exporters.

Direct employment has fallen among 27 per cent of the companies surveyed while an indirect impact has been experienced by companies supplying experts with components. "These companies are losing out as exporters switch business to sterling suppliers in order to maintain cost effectiveness," Mr McDonnell said.

According to the survey, 33 per cent of companies surveyed had seen sales to Britain decreasing. Almost 60 per cent had seen their profit ratios declining. Britain accounted for 30 per cent of turnover for the average company surveyed.