THE pound has fallen hack to almost parity with sterling after the British currency rose sharply in response to a surprise 0.25 per cent increase in British interest rates to 6 per cent. The fall in the pound, if sustained, could put pressure on Irish inflation by pushing up import prices. It thus makes further falls in Irish interest rates much less likely.

In a policy change, the Central Bank intervened in the foreign exchange market yesterday, buying pounds, apparently to try to stop the pound falling below parity against sterling. Traders said the amounts involved were small but served to put a floor under the pound's fall at 100.2p.

The authorities are understood to favour a stronger rate against sterling but a desire by the Central Bank to see a lower level of foreign exchange reserves at the end of the year may also have weighed on the decision. The bank's reserves have built up rapidly in recent months due to its selling the pound on the market and buying foreign currency.

At the same time, sterling's rise led to the pound strengthening against the deutschmark. It rose to DM2.4674, 1.4 pfennigs higher on the day and moving the pound: above the old 2.25 per cent band against the deutschmark.

The Central Bank would probably prefer the pound to remain within the former 2.25 per cent hand, as it does not want questions raised about the pound's exchange rate stability within the EMS, which is a qualifying criteria for monetary union. But it is seen as much less crucial than failing the inflation target.

The gains against the deutschmark also put what may amount to the final nail into the coffin of the attempt by the Government and the Central Bank to avoid a green pound revaluation. Farmers are now likely to face a cut in the value of their intervention payments by the middle of November because of the recent strength of the pound against other EMS currencies.

The pound closed at 100.31p against sterling from 100.9p a day earlier, having dipped to 100.2p at one stage.

Yields, or long term interest rates, on Irish bonds also strengthened significantly. The yield on the five year bonds rose to 6.09 per cent from 6.03 per cent a day earlier, indicating that the market certainly does not see any interest rate fall over the coming months.

Dr Dan McLaughlin, chief economist at Riada Stockbrokers,. criticised the Central Bank for selling pounds recently with ,the pound falling against sterling. "That was taking unnecessary risks with inflation," he said.

He added that if the Central Bank had been intervening yesterday to buy Irish pounds. it would he a welcome change of tack. "What we need is for the currency to go up; it just does not work to peg it to the D mark. That jeopardises Irish inflation and risks making the same mistake former British Chancellor Mr Nigel Lawson did from 1987.

He pegged sterling to the Dmark and ultimately unleashed an inflationary boom. We have no choice but to tighten policy. That means higher interest rates or a strong exchange rate."

Mr Jim Power, chief economist at Bank of Ireland, warned that a continuing low rate against sterling could feed through to higher prices very quickly. "There is a distinct danger we will see higher magazine and newspaper prices," he said. It will also affect food, clothing and footwear imported from Britain."

He added that sterling could move as high as DM2.50 over the coming weeks. It closed yesterday at DM2.4632 from DM2.4310 a day earlier. "If the pound is allowed to find its own level and also rises to around DM2.50 we will remain around current levels," he said.

"However, if the pound is kept around these levels against the Dmark, it could fall as far as 98.5p against sterling. That would be a depreciation of 5 per cent over a couple of months and would certainly cause inflationary problems down the road."