Is sterling overvalued? Certainly for the past three years nearly all economists here would have told you it was. Indeed they would have been backed up by many of their British counterparts. Even the Bank of England would have admitted it privately.

Now a member of the Bank of England's monetary policy committee is even warning that UK interest rates may have to rise further than they would otherwise, purely because sterling is overvalued.

According to Mr Willem Buiter, a Bank of England committee member, sterling is between 15 per cent and 20 per cent overvalued.

Perhaps the central banker is being more than usually verbose, as he is leaving next month to take up a role as chief economist at the European Bank for Reconstruction and Development.

Recently it emerged at its February meeting, that the Bank of England had considered intervening to temper the strength of sterling. Such a move was rejected, but it demonstrates a widespread worry about the ongoing impact of the currency's strength.

It may not be just Mr Buiter who does not hold with the theory that sterling has gone through a re-evaluation or re-rating, in the light of the British economy's improving performance. Nor does everyone hold with the theory that the British economy is closest to the American economy, and thus it is correct for sterling to ride on the dollar's coat tails.

In a recent interview, Mr Buiter insisted that everything always returns to reality - it just depends how fast.

Of course some of his critics may quietly point out that unlike the governor and many other MPC members, Mr Buiter is a key proponent of the UK joining the euro. And, of course, a very strong sterling makes that both more difficult and less likely.

But it is also possible that sterling is not overvalued, or that it may be just marginally overvalued. Goodbody Stockbrokers chief economist Mr Colin Hunt argues that this is the case.

Many proponents of a lower sterling argue that its equilibrium or fair value is around DM2.60 (€1.33) or DM2.70. These are the levels which the Treasury and Bank of England respectively would like to see it joining the euro at, if it ever does join.

But according to Mr Hunt these type of levels were only prevalent from 1992 to 1996. At that time the Bank of England was not independent, interest rates were on the way down, the government was politically unpopular and monetary policy was suspect.

Almost all of these factors have been reversed. The Bank of England now has independence, the economy is booming and the government is almost certainly going to win a second term next year.

There are other reasons for the Bank of England to want to see a decline in sterling's value. This week, French carmaker Peugeot which employs about 3,000 staff in England said it may have to cut back investments and even jobs because of sterling's strength. Other car makers such as Nissan, Toyota and Ford have also struggled and BMW even cited the currency's strength as a reason for selling Rover.

Of course these firms are being adversely affected by sterling's strength, but they are also being hit by higher interest rates in Britain than anywhere else in Europe and by oil prices.

So what is the likelihood of a decline in the price of sterling? The answer is: unlikely in the short-term. Sterling is caught up with the value of the dollar and that has been soaring in relation to the euro almost since the latter's inception.

It now appears a decision on whether Britain will join the euro has been long fingered and there are even muted suggestions about the possibility of eventually forming a quasi-dollar peg - in other words pursuing a policy to keep sterling in line with the dollar - rather than join the euro.

With the Danish vote on euro membership due on September 28th, the single currency is in danger of weakening again. After all, if the strong European economies of Denmark and the UK still wish to stay out, but other more volatile economies such as Greece, join, it may not prove a huge selling point among international fund managers.

And indeed, the last time the markets were faced with a good reason to sell sterling they did not take it. In the autumn of 1998, as Mr Hunt puts it, the British economy was almost facing into a period of famine and pestilence. The argument was that interest rates were too high, the economy was heading into recession and the emerging markets crisis was unfolding. If you needed an excuse to sell the currency that was it. And few took it, the currency merely drifted gently lower but did not correct to any significant extent.

Now the only factors likely to cause a significant correction is an announcement that Britain is set to join the euro - but that is unlikely - or a fall off in the dollar and resulting appreciation of the euro.

Not one of these events appears imminent, and as a result the strength of sterling will remains a problem of policymakers here, worried about inflation.

jsuiter@irish-times.ie