THE authorities face a serious choice between interest rates and exchange rates over the coming months.

A difficult choice now looms between running the risk of higher inflation or an uncompetitive pound, according to Mr Austin Hughes, economist at Irish Intercontinental Bank.

The dilemma means the difficulties which Ireland faces in entering monetary union are more serious than for any other participant. The choice facing the authorities is whether to try and edge the pound closer to current central parity of 2.41 deutschmarks or alter that parity.

Mr Hughes notes that there is a significant risk that joining the single currency at the central parity and bringing interest rates down to European levels would prompt a dramatic rise in inflation which would scar the economy in the early years of the single currency. This would erode competitiveness and weaken long term output as well as employment prospects.

The other risk is at the opposite end of the scale and where joining the single currency at an uncompetitive level could damage the outlook for economic activity and employment.

Without a clear idea of what sterling is likely to do over the coming years and where, if any where, it will enter EMU, it is impossible to make a completely rational decision.

However, if sterling remains around current levels for some time and only falls after EMU begins, the negative impacts of a of the sterling depreciation highlighted in last years' ESRI report are likely to be amplified.

Mr Hughes adds that it is noteworthy that the head of Rover UK said recently that Britain should consider eventual entry between 2.20 and 2.40 deutschmarks.