VOLATILITY continued on the foreign exchange markets yesterday with interest rates remaining under continuing pressure.

A rise in UK interest rates and news that the Bank of England would be given more independence in setting rates drove sterling almost three pfennigs higher.

The pound slipped briefly below 92p against sterling as the UK currency reached a four-and-a-half year high against the deutsch mark. It closed at 92.1p against sterling from 92.45p and at 2.5885 marks from 2.5835.

At one stage, sterling's rise pulled the pound up to 2.60 marks where, as predicted, serious selling set in.

As news broke that Irish Permanent had increased its rates in response to last week's money market trends the Central Bank once again intervened to stop rates rising further.

However, some analysts are questioning whether the Bank will keep a cap on further rises if serious selling re-emerges in the coming weeks.

Meanwhile, the IFA backed moves by the Minister for Finance to send the currency lower. However, deputy president, Mr Michael Slattery, said it is still over-valued and needs to fall further.

In the short-term, sterling is expected to remain strong which increases the chances of another bout of anxiety on Dublin's money markets.

According to Mr Jim Power, chief economist at Bank of Ireland, sterling is likely to appreciate to 2.85 marks, although it will remain volatile with dips below 2.80 marks. It closed yesterday at 2.8164 marks.

"That will drag us back up in the ERM grid and dealers will believe that when the pound rises beyond 2.60 marks it becomes a one-way bet again," he said.

The pound has been trading at just below 8 per cent higher than the weakest currency in the ERM grid. If last week's falls had not materialised that would be almost 12 per cent, Mr Power noted.

However, the continued possibility of speculative pressure means that further interest rate rises cannot be ruled out.

According to Mr Austin Hughes, economist at IIB there is still a "significant threat" of renewed upward pressure on Irish interest rates in the weeks ahead.

Mr Power noted that the Central Bank is likely to be concerned if the pound falls towards 2.55 marks and 90p against sterling. "I would not rule out anything from an interest rate point of view," he said. "But if selling pressure intensifies higher rates could be an option.

The new UK Labour government stunned financial markets on Tuesday when it announced the central bank would have operational independence to set interest rates and fleshed out plans for a new monetary policy committee which will hold executive power.

The changes appear to be bullish for sterling. However, the strong currency is hurting UK exporters. Many analysts pointed out that Mr Brown said he wanted a "stable and competitive" pound over the medium term.