Falling value of euro places Irish inflation figures under pressure

The continuing decline in the value of the euro, as investors focus on ongoing growth in both the UK and the US, is placing further pressure on Irish inflation figures.

The rise in the value of sterling, in particular, is likely to see further increases in the costs of imports and services from the UK and undermines the Government's hopes that a euro recovery would relieve inflationary pressures.

A bullish quarterly inflation report yesterday from the Bank of England will have underpinned sterling, according to analysts, and ongoing support from high productivity in the US is likely to continue to support the dollar.

The euro closed at $0.8980 from $0.9005 on Tuesday. It remained flat against sterling at 59.80p and as a result the pound remained at 76.02p against sterling.

Earlier in the day the euro had fallen to $0.8960 - just below key technical support at $0.89.80 but rose quickly again. According to Dr Dan McLaughlin, chief economist at ABN Amro, the currency could have fallen much further if it had closed below that key level.

The Bank of England's report was mildly hawkish pointing out that the inflation forecast in two years time is slightly more than 2.5 per cent. Because the Bank of England is mandated to keep inflation at 2.5 per cent that suggests more interest rate rises may be on the way, as hinted by MPC member Mr Mervyn King. As a result there is probably quite good support for sterling and very heavy sellers are not seen on the horizon.

But it is the Monetary Policy Committee and not the Bank of England which decides on interest rate changes.

Sterling's strength against the euro is bad news for inflation here and this is being compounded by new pressure on oil prices. The authorities will be hoping that the rise in the price of Brent crude - once again touching $30 a barrel - is a temporary one. If sustained, it could mean a reversal of recent petrol price cuts and would be bad news for inflation in the second half of the year.

According to Dr McLaughlin the euro is likely to stay under pressure against the dollar which is being buoyed by the so-called "Goldilocks" economy in the US - not too hot, and not too cold. Very good growth and very little inflation compared with the euro zone also makes the dollar a very attractive buy.

Even if euro-zone growth does pick up significantly there are few who believe that there has been a dramatic change in the rate the economy can grow without generating inflation. This rate is commonly thought to be around 3.5 per cent in the US whereas it is closer to 2.5 per cent in Europe.

But currency forecasting is not straightforward and Dr McLaughlin is predicting a euro rate of around 93 cents at the end of September although it could fall to 88 cents in the meantime.