Sterling surge balances parity scales

Why has the Irish pound suddenly fallen back to 100 sterling?

It is all to do with a strong performance by sterling on the foreign exchange markets. Renewed optimism about the British economy and a boost in market confidence in Chancellor of the Exchequer, Mr Kenneth Clarke after this week's interest rate rise has encouraged investors to buy the British currency. This has taken market forecasters completely by surprise, but then they rarely foresee such changes in sentiment in any case. The rise in sterling has led to the pound falling from over 104p a couple of months ago to just over loop now.

Has the pound also fallen against other currencies?

On the contrary, Sterling's strength has rubbed off on the pound to some extent. The Irish currency's value has risen strongly against the deutschmark and other continental EU currencies.

What does it mean for the economy?

Because the pound is moving one way against sterling and the other way against other currencies, the overall impact on the economy is not clearcut. Imports from Britain will become more expensive in Irish pound terms, if sterling remains strong. This would feed through to prices in the shops. Economists are divided on how serious this problem could be, with some arguing that the pound's strength against other currencies will help to offset the inflationary impact of the decline against sterling. But the Government and the Central Bank are keen that the pound remains comfortably above parity to act as a safeguard against inflation.

But surely inflation is very subdued?

The rate of inflation is very low at the moment - 1.5 per cent according to the most recent measurement. But low inflation next year is one of the criteria for qualification for monetary union and the Government and the Central Bank want to be sure that a jump in the consumer price index here next year does not rule us out. So they are likely to err on the side of caution in managing the currency.

So what will they do?

The Central Bank cannot control what happens on the foreign exchange market, but it can have an influence on the pound's value. It is likely to step into the market and buy pounds to try to keep its value above parity with sterling, while also trying to keep the currency as stable as possible against the other ERM currencies. Achieving both of these goals may not be possible; it all depends on the trends on the foreign exchange markets.

Is sterling likely to rise further?

You can pay your money and take your chance on this one. It looks well in demand at current levels and may rise further next week, but beyond that it is hard to say.

Much will depend on the British budget at the end of this month. Privately most market analysts admit to being taken aback by its recent surge and unsure what will happen next.

What does it mean for interest rates?

This week's increase in British interest rates has no immediate implications for Irish rates. But further fall in the main variable interest rates paid by most borrowers are no longer on the cards, although the rate on longer-term fixed interest rate products - such as five-year fixed rate mortgages - may continue to edge down.