Pound's climb intensifies Central Bank's difficulties

THE pound has risen further in the ERM band, intensifying the difficulties facing the Central Bank in managing the currency. The Irish currency rose more than a pfennig against the weakening deutschmark yesterday to over DM2.6550 and fell below 98p against a strengthening sterling.

The recent strength of the pound has left it detached from the other currencies in the ERM band. It closed last night at just fractionally below 11 per cent above the French franc, the weakest currency in the band. Any further rise in the pound's value would leave it uncomfortably close to the ceiling of the ERM band, which is 15 per cent above the weakest currency.

The Maastricht rules for qualification for the single currency say that a currency must trade within the normal ERM bands last year and this year to qualify for inclusion in monetary union. For this reason, the Central Bank and the Government are determined that the pound does not breach the 15 per cent band.

Market analysts believe the strength of the currency will put pressure on the Central Bank to cut interest rates in the weeks ahead, despite the strength of the economy. However such a move would also carry risks in relation to meeting the Maastricht rules, as it might further boost the economy and run the risk of meeting the inflation criteria.

Much now depends on the trend in sterling. The British currency has risen by nine pfennigs against the deutschmark this week as investors. As a result the pound has risen by more than five pfennigs, closing yesterday at DM2.6556. It ended 10.82, per cent above the French franc.

Some uncertainty surrounds the outlook for the British currency. Some analysts believe that it has further to rise, encouraged by the strength of the British economy. Investors are also increasingly disenchanted with the deutschmark, according to Mr Jim Power, economist at, Bank of Ireland Group Treasury, with the latest rise in unemployment further highlighting the weakness of the German economy.

However, some London analysts said yesterday that political uncertainty could soon hit the British currency. Once the British Prime Minister. Mr John Major, calls the general election, then this could lead to some nervousness surrounding the currency, they believe.

Yesterday, sterling benefited from a rise in the dollar after benign US jobs and earnings data helped to calm worries about a possible rise in US interest rates.

The dollar opened strongly in Europe on the expectation that, the world's main industrialised nations, would not try to shoot it down at this weekend's meeting in Berlin of, Group of Seven finance ministers and central bank governors.

It set a fresh 32 month high at DM1.6732 after the US data and a four year high against the yen at 124.56. The US jobs figures also led to strong gains on the international markets.

The US unemployment rate edged up to 5.4 per cent last month from 5.3 per cent in December, even though the economy created more, jobs than it has since last summer, the government said on Friday.

The US Labour Department reported that 271,000 nonfarm jobs were created, the most since August, alter payrolls grew by 261,000 jobs in December.