The pound has fallen to its lowest level against sterling in more than six years, dropping close to 88p as the British currency continues to surge ahead on the foreign exchange markets. The decline is being closely monitored by the Government and the Central Bank, which will be concerned that it could fuel inflation.
The Irish currency fell by more than 0.5p against sterling to close at 88.41p yesterday, having traded as low as 88.25p earlier. If the pound remains at these levels then it will soon feed into higher prices in the shops for goods imported from Britain, although economic forecasters are divided on how serious a threat this poses to the outlook for inflation.
The pound fell yesterday as investors continued to buy sterling on the markets, encouraged by the prospect of higher British interest rates. Because sterling is not seen as a likely founder member of monetary union, it is also attracting money because of concerns about the EMU project. The decline in the Irish currency's value is providing a major boost to exporters to the UK market. However, trends on the currency markets are not favouring those selling to Continental EU countries, as the pound remains very strong against the other ERM currencies. Any further weakening of the pound may lead to nervousness that the Central Bank might consider increasing interest rates in a bid to support the currency. However, the Dublin interbank interest rate market remained calm yesterday, with no sign of any desire by the Central Bank to see borrowing costs rise in the short term. The pound is being caught in the cross-fire between sterling and the deutschmark on the currency markets. Yesterday, investors sold off the German currency due to rising concerns about the outlook for monetary union and the risk that the new euro currency may not be as strong as the deutschmark. This led to heavy demand for sterling, which rose above Dm 3.04.
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