Pound's revaluation seen as less likely

Analysts are divided over the prospects for the Irish currency, following the weekend meeting of EU finance ministers. Most domestic economists seem to believe that a revaluation of the pound's central ERM rate is now less likely. Thus a slow and steady decline of the currency against the deutschmark is in prospect. The thinking here is that the authorities will be keen to maintain Ireland's competitiveness in the run-up to monetary union.

Both Mr Jim Power, chief economist at Bank of Ireland, and Mr Jim O'Leary, chief economist at Davy Stockbrokers, believe a revaluation is now even less likely than it was before the weekend.

According to Mr Power, the weekend's announcement gives the Irish authorities scope to sit on their hands until next spring, before making a decision on which rate to lock in at. He noted that sterling has fallen nearly 30 pfennigs over the last five or six weeks and that it could have a lot further to fall.

"If sterling did fall to 2.60 deutschmarks there would be no problem in the pound locking-in at 2.41 D-marks, which would imply a rate against sterling of around 92.70p," he said.

He added that the authorities will be keen for entry at as competitive rate as possible. "It is very clear that Irish exporters to Germany have had a very difficult year because of the strength of the currency." Mr Power added that there would be few inflationary implications of entry at 2.41 deutschmarks, noting that last year the pound was trading at below that level. "In addition we would not be locking-in at any rate against sterling which would continue to be determined by market forces."

Davy's Mr O'Leary also believes that the meeting has diminished the chances of a revaluation.

"This is particularly true if you believe, as most analysts do, that sterling is on a downward trajectory," he said.

"The Irish authorities' decisions will be influenced by where sterling is trading, so the longer the time period the less likely a revaluation is and if it occurs, the more likely it will be small rather than large."

He added that the announcement that exchange rates will be determined in May is generally positive for Ireland.