THE Central Bank has sold substantial amounts of pounds over the past three days in a move seen as an attempt to prevent a revaluation of the EU "green pound" and a consequent reduction in the value of EU subsidies to farmers.
The selling, described by market sources as "substantial", has pushed the pound down from 103.04p against sterling on Friday to 102.86p at the close yesterday. At the same time, the pound has fallen from 2.4360 deutschmarks last week to DM2.4296.
The fall in the value of the pound might seem modest but the Central Bank intervention came despite inflationary fears, as up to £110 million of intervention money to support Irish farmers was at risk if the value of the pound was not reduced.
The strength of the pound in recent weeks has forced a revaluation of the "green pound" or the money which is paid to farmers in intervention subsidies. If the revaluation goes ahead, the ECUs' which the farmers are paid will be worth up to 3 per cent less.
Senior market analysts said they were convinced the risk to farmers incomes was the main reason for the intervention. The Central Bank refused to comment. Sources pointed out that with the depth of the farmers anger over the BSE crisis the Government would be reluctant to anger the sector further.
Mr Jim O'Leary, chief economist at Davy stockbrokers, said he believed the Central Bank was intervening to "prevent a green pound revaluation which would reduce agricultural prices".
A revaluation of the "green pound" could cut farmers intervention money by between 2.5 per cent and 3 per cent. In a market worth £4.4 billion last year that could mean losses of up to £110 million for Irish farmers.
Intervention money is paid in ECUs, the basket of European currencies. The so called "green rate" determines the value of intervention payments and only varies if the gap between the market rate and the green rate is greater than 5 per cent over 10 days. With the recent strength of the pound, the gap was around 5.3 per cent over the 10 days to September 20th and the revaluation was triggered.
However, if the gap is narrowed over the next 10 days the revaluation can be "detriggered". The gap now needs to be kept below 5 per cent until the next period ending on September 30th. The gap has been pushed down to around 4.85 per cent so far this week.
Director of policy at the Irish Co operative Organisation Society (ICOS), Mr Martin Varley, welcomed the reduction in the value of the pound so far this week and highlighted the fact that it was essential that the pound remains in a weaker position than it had been through most of September. "Provided the currency does not strengthen, the revaluation of the green rate will be detriggered on September 30th," he noted.
Last week, the ICOS called for a reduction in the value of the pound. It estimated that the revaluation could cost the food sector £60 million a year. Mr Varley sought a meeting with the Central Bank and ministers to prevent the revaluation.
The move will also come as some relief to Irish exporters who are worried that a strong pound makes exports to Britain less competitive and puts jobs at risk. The Irish Exporters Association has been pushing for just such a move from the Central Bank.
Dr Dan McLaughlin, chief economist at Riada Stockbrokers, warned the move was "not positive" for the inflation outlook. "The normal safety valve for inflation is an appreciating currency," he said, "so it is interesting that the Central Bank is selling it to keep it down, given. pressure from the agricultural lobby."
Mr O'Leary questioned the action. "Monetary policy is supposed to be about price stability, not to prevent a fall in agricultural prices," he said.
He added there was a "fundamental inconsistency" at the heart of Central Bank policy. "On the one hand it pushed for interest rate increases and on the other hand it is intervening to depress the value of the pound. In anyone's book that is mutually inconsistent as the inevitable consequence of selling is to put downward pressure on rates,
