Markets target a jittery punt

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The Irish Central Bank finally bowed to the inevitable last week and raised interest rates to defend the punt after it had come under attack from currency speculators. But the move is not expected to halt further selling in the currency this week.

Official interest rates were raised a quarter percentage point to 6.75 per cent on Thursday after the punt fell as much as 4 per cent against the deutschmark in three days. Speculative selling began in earnest on Tuesday after the central bank indicated it was no longer prepared to prop up the currency.

Economists said the rate rise will do little to deter speculators, who are selling on expectations that the punt will enter Europe's planned single currency at its central rate of 2.41 deutschmarks in the European exchange rate mechanism. That implies a drop of about 17 pfennigs between now and the end of next year.

Bank of Ireland chief economist, Jim Power, said the "next big test" for the punt would be on Tuesday. "There is some risk that the speculators will have another go at it," he said.

The impact of the interest rate rise in calming the market cannot be judged until then as European markets were closed for the May Day holiday on Thursday and many European investors will not be back at their desks till tomorrow, when Irish markets themselves are closed for the Bank Holiday.

The punt rose to 93.25 British pence, from 92.20, before the rate increase, while it rose to 2.5900 deutschmarks, from 2.5801.

The British pound was volatile though as traders assessed the impact of the Labour party's overwhelming victory in the UK. A rise in sterling this week could push the punt back up against the deutschmark, providing further fodder for currency speculation against the punt.

In addition to the fall of the punt, which raises concern about imported inflation, lending figures released by the central bank last week added to the pressure for higher rates. Meanwhile, non-government borrowing rose 18.6 per cent in March from a year earlier.

Irish building societies hinted that the rise in official rates could spark a 1 per cent increase in mortgage interest rates. This may help take the froth out of Ireland's booming property market where house prices have risen 14 per cent in the last year.

The rate rise runs counter to Irish official policy of joining monetary union from the start, in 1999. If Ireland is to be a founding member, Irish interest rates must fall closer to German levels in the run-up to monetary union. Irish official interest rates are now more than double those in Germany. Copyright: IOS & Bloomberg