Sterling fell to its lowest ever level against the euro in trading on foreign exchanges yesterday. The UK currency closed at £0.7443 against the euro and has now declined by more than 10 per cent against the European currency in the past six months.
At the end of June 2007, the euro's exchange rate against sterling stood at £0.6740.
The steep decline in sterling's value in recent months will make Irish goods and services more expensive on UK markets, thereby undermining Irish price competitiveness. The UK is the Republic's second-biggest foreign customer and the most important export market for indigenous Irish businesses.
The weakening in sterling will also act to reduce the euro value of Irish investments in the UK, particularly in property.
Conversely, the fall in sterling's value will reduce the cost of British goods and services imported into the Republic. The UK is the Republic's principal supplier of imported goods.
In 2006, the Republic imported merchandise valued at €19.4 billion from the UK, equivalent to 32 per cent of all merchandise imports that year.
By reducing the cost of imports, sterling's recent slide should act to curb the rate of increase in Irish consumer prices in the months ahead.
The sharp fall in the British currency in recent months is attributable to three main factors.
First, confidence in the Bank of England was undermined by its inept handling of the Northern Rock banking crisis during the autumn.
Second, British economic growth is losing momentum. In its most recent global economic survey, the International Monetary Fund forecast that the rate of British economic growth would ease back from 3.1 per cent in 2007 to 2.3 per cent this year.
Third, and most importantly, financial markets are anticipating further cuts in UK interest rates in the months ahead.
At the beginning of December, the Bank of England's Monetary Policy Committee voted unanimously to reduce the UK bank rate by a quarter of a percentage point to 5.5 per cent.
