Pressure on interest rates eases

PRESSURE on Irish interest rates has eased significantly because of a sharp fall in the value of sterling on international money markets.

Heavy selling of the British currency pushed the pound up to 93.9p sterling in late trading yesterday, almost three quarters of a penny stronger on the day and 2p stronger on the week. Pulled back by a weakening sterling, the pound edged down against the deutschmark to DM2.5725 from DM2.5740.

On the interbank market the benchmark one month interest rate eased back to just over 6 per cent from 6.25 per cent.

The rise in the pound against sterling and its easing against the German currency has created "a dream scenario" for the Central Bank, according to Bank of Ireland Treasury chief economist Mr Jim Power. If current conditions are maintained, he forecast that the latest interest rate increases could be reversed.

Asked if the Central Bank decision last week to raise its core interest rate by a half of a percentage point was the wrong move, Mr Power said that with the benefit of hindsight it could be seen as "hasty". But be added that the markets were dynamic and subject to sudden fluctuations.

The Central Bank could justify its half point rate increase on the basis of concern about the strong growth in private sector credit, the 18.6 per cent growth in March being more than twice the level it would consider desirable, he said.

The moves on currency markets this week are a direct reversal of the position in the previous week when the pound fell sharply against sterling. That fall in the value of the pound, which influenced the decision to raise interest rates, was partly attributed to remarks by the Minister for Finance, Mr Quinn, intimating that he was unhappy with the strength of the pound within the ERM.

Speaking in Cork yesterday, Mr Quinn commented on the fluctuation in the value of the pound in the run up to European Monetary Union. "My intention would be that Ireland would join at a rate that meets the needs of the Irish economy in the fullest sense of the word, and that we would be looking at how best to do that. At the present time, clearly the central rate is suggesting a lower rate than the market rate but there are a lot of positions in between these two and we will be looking at all those intermediate positions to see what is in the best interests of the Irish economy", Mr Quinn said.

The sharp slide in sterling yesterday afternoon took the markets by surprise. Some dealers linked the fall to alleged comments from unnamed Labour Party sources that sterling should reenter the European Exchange Rate Mechanism at a rate of 2.50 against the deutschmark. Others suggested that the new Chancellor, Mr Gordon Brown, had intimated he was uncomfortable with the strength of sterling.

Some dealers attributed part of the fall to weaker than expected manufacturing output figures released on Tuesday. These figures showed clearly that British manufacturers were suffering because of the strength of sterling, they suggested. Another reason put forward was that sterling was pulled back in sympathy with a weaker dollar.

Sterling fell three pfennigs against the D mark to close at DM2.73. Over the last week sterling has lost 10 pfennigs against the German currency. Sterling has fallen against the dollar while the dollar has fallen against the D mark. A weaker sterling helped the pound rise against the dollar and it closed one cent stronger at $1.52. Dealers speculated yesterday about the possibility of another British interest rate rise of a quarter of a percentage point as early as next week.

For the pound, the latest money markets movements are positive. The pound ended the week stronger against sterling and weaker against the deutschmark. Within the ERM, the pound ended the week 7.25 per cent ahead of the weakest currency (French franc) compared with 12 per cent ahead two weeks ago.