All European short-term interest rates will be at 4 per cent by next May, the former president of the Bundesbank said yesterday.

Speaking at a Montgomery Oppenheim investment conference, Mr Karl Otto Pohl, said there will be a "de facto" monetary union after May next year.

Mr Pohl, who was the most senior central banker in Europe until 1991, is now chairman of the partners at Germany's largest private bank Sal Oppenheim, which bought 60 per cent of Montgomery Govett investment managers in July this year. It is the first IFSC company to expand into the domestic market and is expected to provide competition for the Irish pension fund industry.

Mr Pohl also ruled out a revaluation of any ERM currency's central rates in the run up to EMU, saying it may be a good idea but he could not see it happening.

Immediately after the decision on conversion rates, the national currencies will become substitutes for one another and interest rates will converge, he said. "Monetary union is a process which will be finalised in May." This would mean a fall of just over two percentage points in Irish interest rates, if Mr Pohl's forecasts are correct. He added that he does not expect German interest rates to rise by very much more. The recent rise in the money market interest rate was a signal of the Bundesbank's intent to go ahead with monetary union and they were effectively doing the future ECB a favour. However, he added, further rate rises will be limited.

"German rates will not go further than 3.5 to 4 per cent," he predicted. He pointed to high unemployment and said the German economy does not need higher rates than that. The main adjustment will be in countries which have pretty high rates.

"There are no domestic reasons for a change in rates," he added.

Mr Pohl also said he is confident that the euro will be strong. If there was high inflation it would be weak, he said. But there is no reason to forecast high inflation with almost 20 million unemployed throughout the EU.

He added that whether it is strong or weak will also depend on the dollar - the only reasonable benchmark.

He pointed out that if the pension funds and insurance companies decide to diversify they are all overweight in dollars. "If they think the euro markets are attractive, we may see upward pressure on the euro, it will depend on the policy of the central bank."

He stressed that the new European central bank (ECB) has a powerful independent constitution. It will be a "superBundesbank", he said.

The biggest problem for the ECB will be that it has to decide on one interest rate, but they have that problem in the US, where there are different conditions in Alabama and New York city.

This could cause problems for Ireland and monetary policy will be set with the interests of the larger members at heart, he said. But he added that the benefits of membership for Ireland, particularly in terms of inward investment, will outweigh the disadvantages.

Britain's decision not to enter monetary union is understandable, according to Mr Pohl. "They are somewhere between the US and Europe and just because they maintain their relationship with continental Europe does not mean they have to join monetary union."

He added that Britain not joining monetary union will not have a major impact on the entire project. "They can live without EMU, and monetary union without them," he quipped. In any case, he pointed out that the UK central bank is not yet independent enough and that inflation may be picking up too fast.

Nevertheless, Britain could conduct monetary policy as if it is a member, he said. This would have obvious benefits for Ireland, he noted.

Mr Pohl also said he is now in favour of a broad-based monetary union.