Pound likely to come under new pressure as sterling strengthens

THE pound is likely to come under renewed downward pressure from sterling over the next few days and dealers believe that the Central Bank will continue to buy the currency to try and keep it above parity against sterling.

Dealers will also be keeping a close eye on the September banking figures which are due to be released by the Central Bank on Thursday, to see the extent of lending growth,

Some in the markets have suggested that if these banking figures show continued strong growth in bank and building society lending, then the authorities may be tempted to increase interest rates once again with the aim of choking any inflationary tendencies before they gain a grip on the economy.

But the predominant view of those in the market is that a rise in interest rates is unlikely in the short term and that it would take exceptionally strong growth in lending for the Central Bank to act.

By its actions last week the Central Bank sent a clear message to the markets that it will intervene to try and keep the pound above parity with sterling and will use its exceptionally strong reserves of foreign currency to this end. The exact strength of the Central Bank's foreign reserves will also be clear when next Thursday's figures are released.

A strong rise in the value of sterling creates inflationary dangers for Ireland, with such a high proportion of our imports priced in sterling. While the Central Bank has never commented publicly on its strategy, sources believe that by its actions in the market in the latter half of, last week, the authorities are placing a higher priority on maintaining the sterling/pound exchange rate than keeping the pound within the old 2.5 per cent ERM band against the deutschmark.

By supporting the pound against sterling, the Central Bank has allowed the exchange rate against the deutschmark to rise to its highest level for three years at DM2.4875, well above the notional DM2.4660 upper limit of the old ERM band. The speed of sterling's rise against all currencies - not just the pound - has taken most in the market by surprise and has forced the Central Bank to accept that a sharp rise against the deutschmark is the price that has to be paid to maintain the pound's value against sterling.

The Minister for Finance, Mr Quinn, and the Governor of the Central Bank are understood to have been in regular contact since sterling's sharp rise in the wake of the rise in British interest rates. Both are thought to be keen to avoid inflationary risks with next year's inflation rate counting towards qualification for the single European currency.

The Government is also thought to be keen that inflation be kept in check while negotiations on a new national agreement are in progress. Any sharp rise in inflation would probably lead to compensating claims from the ICTU as part of any new agreement.