Pound could be set for further falls against sterling

The pound could be set for a further significant fall against sterling, a leading German economist has warned.

Mr Norbert Walter, chief economist at German bank, Deutsche Morgan Grenfell, warned yesterday that sterling could be set to appreciate significantly before it eventually weakens. Nevertheless he insisted that revaluation would be a mistake for the Irish authorities.

Mr Walter said in an interview with The Irish Times that sterling was set to appreciate to about DM3.20 over the first half of this year from a closing level yesterday of about DM2.9700.

It is the recent strength of sterling which has prompted the pound's fall and consistent rumours of an imminent revaluation.

Such a high sterling level could cause the pound to slide as far as 73p or 74p against sterling. Over recent months, the authorities here have been waiting for a slide in sterling which would take the pressure off the pound and allow us to enter monetary union at our current central rate of DM2.41.

If sterling were to appreciate to that degree, it would create significant pressure for a revaluation.

However, Mr Walter insisted that the issue of locking into the euro was "forever" and should not be in the least bit influenced by "cyclical leads" which Britain currently enjoys over continental Europe.

However, he is predicting that sterling will eventually decline. Britain, he said, was too European, and could not follow the dollar up indefinitely. After the coming cyclical slowdown, it would be below DM3 and would eventually reach its long-run equilibrium value at about DM2.60, he predicted.

If this proves to be true, the pound will depreciate significantly against sterling over the coming months but will eventually move back to more than 90p.

In contrast, Mr Walter believes that the dollar will remain strong throughout 1998 and 1999 and that the new euro will be weak during this period.

Inflation, he predicted, would remain low on average throughout Europe which would keep interest rates very low. Irish rates will fall to 4 per cent or below, he predicted, as they converged on German levels.

"European inflation will not be above 2.5 per cent for some time and so short-term interest rates will be even lower than those Germany has enjoyed in the past."

He added that foreign reserves would not go into the euro until the new European Central Bank pursued a policy which ran counter to the interests of an individual country. After that, it would assume some credibility with international investors but that was unlikely before 2000, he added.

Mr Walter also downplayed the impact of the crisis in the Far East. There would not be meltdown, he insisted, if there was stability in Japan and the exchange rate anchor in China held.

The main effect would be on commodity prices, he said. And, as a result, it might reduce global growth by between half and one percentage point in 1998 but there would be no impact in 1999.