THE Central Bank has sent a clear signal to the market by stepping in and buying Irish pounds to drive the currency back above parity with sterling. The pound fell as low at 99.4p sterling yesterday, but after heavy Central Bank buying in the afternoon closed back above parity at just over 100.1p sterling.

The move by the Bank indicates its desire to maintain a strong currency to continue to bear down on inflation. The Central Bank is flush with reserves of foreign currency, after selling the pound to hold its value down and buying other currencies earlier this year. It now has considerable resources to support the Irish currency's value against a rising sterling.

The Central Bank is trying to manage the surge in sterling in a way which avoids undue volatility of the pound's exchange rate, although yesterday's intervention sent the currency to its highest level for three years against the deutschmark. It closed two pfennigs higher at DM2.4875. While market sources did not detect Central Bank intervention on Thursday, the bank is also now understood to have moved into the market that day to support the currency.

The intervention indicates the concern of the Government and the Central Bank that the currency should trade above parity with sterling to stop the danger of rising import prices pushing up the rate of inflation. If forced to choose in the weeks ahead, the bank is likely to continue to try to keep the pound over 100p sterling, even if this pushes it higher against the deutschmark.

Ideally the Central Bank is believed to be trying to maintain as stable as possible a link to the other ERM currencies and to avoid undue volatility, while managing the rise of sterling as best it can. The latest rapid rise in the British currency has taken everyone by surprise, however, and has forced the bank to accept a sharp rise against the deutschmark as the price of maintaining the pound above parity `with sterling.

The Minister for Finance, Mr Quinn and the Governor of the Central Bank, Mr Maurice O'Connell, are understood to be in regular contact about developments on the currency markets. They are both keen to avoid any inflationary risks, with next year's inflation rate counting towards qualification for the single currency.

Government and Central Bank forecasters are not thought to be unduly worried about the immediate inflationary impact of the latest currency moves. The Government, which sets exchange rate policy, would be more comfortably with a rate of 101p to 102p sterling for the pound. There is particular concern that inflation not start to pick up with negotiations on a new national agreement underway.