Ireland lifts base rates to defend shaky punt plunges

Ireland's central bank yesterday reacted to two turbulent days for the punt on foreign exchange markets by lifting base rates by half of a percentage point.

Heavy speculation against the punt saw it plunge seven pfennigs against the German mark on Wednesday. A 2.5p fall took the Irish currency to its lowest value against sterling for five years, slumping at one stage to 91.5p.

Parallel pressure on domestic money markets prompted the bank to increase its base rate or short-term facility to 6.75 per cent with effect from this morning. The move was expected after the bank on Wednesday stopped buying punts to shore up the currency's value.

The punt has been targeted by speculators in recent weeks because Ireland is among Europe's strongest economic performers in qualifying for the start of the European single currency in 1999.

Ireland's "Celtic Tiger" revival has seen the currency strengthen in recent years. But many dealers believe the punt will join the single currency at a lower value against continental currencies than its recent ERM level.

Buoyed by a bullish medium-term economic forecast this week by Ireland's Economic and Social research Institute, Ruairi Quinn, Finance Minister, emphasised that the country was no longer tied to sterling.

The institute's forecast, the most hopeful in decades, concluded that if current policies and voluntary pay restraint continue, Ireland should maintain GNP growth of 5.5 per cent until 2000, slowing to 5 per cent between 2000 and 2005. This will see Ireland pass the UK standard of living before 2005.