THE pound has fallen back sharply against a resurgent sterling, on a day which has demonstrated clearly the difficulties which the Central Bank is having in managing the money markets.

The pound fell by more than 0.65p to 102p sterling yesterday, but remains the strongest currency in the ERM band.

The Central Bank was intervening to push the pound lower as it rose against the deutschmark and appears to want to keep the currency from rising too rapidly in the ERM band. But despite the intervention the currency rose slightly against the deutschmark to close late yesterday above DM2.46.

The latest developments are causing significant difficulties for the Central Bank. The Bank appears to want to keep the pound's rate against the deutschmark within the 2.25 per cent margins set by the old ERM narrow band, but with the Irish currency tending to rise in tandem with sterling, this is proving difficult.

The Bank has also intervened recently to stop a rise in the currency from triggering a revaluation of the green pound, which would cut EU payments to Irish farmers.

The problem for the Bank is that intervening in the market by selling pounds puts more of the Irish currency back into the Dublin money market and puts downward pressure on interest rates. Market sources said that late yesterday the Bank moved into the money market to stop money rates falling back in the wake of its earlier interventions in the currency market.

Last night market analysts said the Central Bank would find it increasingly difficult to balance its exchange rate and interest rate objectives. Mr Dermot O'Brien, chief economist at NCB stockbrokers, said that the Bank could be forced to allow interest rates to move lower on the money market in the weeks ahead.

He said the Bank should not be concerned that this would fuel inflation, as the latest wholesale price figures for September showed output prices from manufacturing running 0.7 per cent lower than the same time last year.

Ireland's effective exchange rate index, the average of the pound's rate against its trading partners, was now running 3 per cent ahead of last year, he said, and this acted as a powerful control on inflation by cutting import prices in Irish pound terms.

Mr Padraic Garvey, economist at Riada stockbrokers, said he believed the Central Bank would have to allow the pound to rise further against the deutschmark. The pound could be allowed rise to 103p sterling and DM2.4850, he said. This would take it above the old ERM narrow band, but the Bank could have no option but to allow this to happen, he said.

Over the coming weeks much will depend on the movements of sterling. The British currency rose sharply yesterday amid positive market reaction to what looked to be new-found unity in the ruling Conservative party.

But analysts warned that sterling's strength could dissipate as quickly as the euphoria of the party faithful at the annual Conservative conference in Bournemouth.

The pound started its upward surge early yesterday in a move which dealers said was the result of an unexpectedly strong conference performance on Thursday by the British Chancellor of the Exchequer, Mr Kenneth Clarke.

Mr Clarke's speech pledged a 20 per cent base tax rate for all when it was affordable and the abolition of capital gains and inheritances.