AS the Central Bank again steps into the market to stop the pound from falling against sterling, a new report from the Economic and Social Research Institute has warned that policymakers may soon have to consider how to lower the pound's value on the markets.
The Central Bank intervened in the market again yesterday, buying pounds to stop the Irish currency falling against a strengthening sterling. As a result the pound closed largely unchanged at 95.43p sterling. However it rose by more than a pfennig against the deutschmark to 2.6653 and closed yesterday evening more than 11 per cent above the weakest currency in the ERM band.
The Bank's recent interventions in the market have followed intense speculation that it was going to be forced to allow the currency to fall in value against sterling in order to stop it rising further against the Continental EU currencies. This is because sterling has risen strongly in recent months and carried the pound with it and the Irish currency is now by far the strongest in the ERM band.
The latest quarterly commentary from the Economic and Social Research Institute warned that if sterling does not soon start to decline in value, then Irish policymakers would need to consider how to lower the pound's value in the run up to the single currency.
It would be "undesirable" for the pound to enter monetary union at its current rate against currencies such as the deutschmark and the French franc, according to the ESRI. This could leave Ireland in an uncompetitive position and hit inward investment, the ESRI warned and would also leave the economy exposed to sharp falls in sterling.
It would be more appropriate for the pound to join at its current central ERM rate of DM2.41, the report said, although it is not clear yet what method would be used to determine at what exchange rates the currencies would be locked.
This issue could resolve itself, the ESRI said, depending on market trends over the next 18 months and the decision on how to set the currency rates. "However, were sterling to remain strong, or to appreciate further, significant transition problems could arise," it warned.
A depreciation of the pound against the ERM currencies, sterling and the dollar would almost certainly push up inflation, the ESRI said. But, it said: "This would appear to be a worthwhile price for avoiding entering monetary union with an overvalued currency." The rate of inflation might rise to around 3 per cent, it said.
However the report did not say how the Central Bank would achieve the recommended depreciation in the currency's value.
The ESRI also warned about the danger of currency instability at the start of EMU. And a leading British currency analysts said that the pound was likely to come under attack from speculators in the run up to EMU, forcing the authorities either to completely ignore the importance of sterling to the economy or pull out of the single currency project.
Mr Jeremy Hawkins, chief London based economist with Bank of America, said that with EU politicians likely to fudge the entry requirements for the single currency, there would be a perception that the new currency - the euro - was "soft".
Meanwhile, with Labour keeping a tight rein on spending, sterling would be seen a safe currency for investors, pushing its value up.
