THE Minister for Finance, Mr, Quinn, was said to be slightly irritated at how his interview with Reuters Television was reported on the news Wires.

The Minister was quoted as saying that he was "somewhat concerned" at the strength of the pound in the ERM grid and that he would prefer it to be closer to its median point.

However, a spokesman for Mr Quinn later insisted that the Minister had been quoted out of context and that he had repeatedly stressed that the pound was "comfortable within the band

Nevertheless, there was little doubt that Mr Quinn would prefer the pound to be lower in the ERM. And as a result the policy focus on the exchange rate has changed in recent weeks.

The authorities are understood to have changed the emphasis from tracking the trade-weighted index to attempting to bring it back closer to its central rate in the ERM - that is 2.41 deutschmarks. Yesterday it closed at 2.6680 around 11.11 per cent above the weakest currency in the grid - the French franc. Sterling closed significantly higher at 2.8124 deutschmarks.

This break with the British currency was seen as a significant success by the Irish policy makers. Until recently the pound would have risen most of the way with sterling against the mark. That would have created serious pressure on the ERM band where the maximum allowed divergence between currencies is 15 per cent. It would also have made the job of getting back towards 2.41 deutschmarks much more difficult.

The authorities are keen to see it fall in the ERM, as it is now looking likely that the central parities would be used for conversion to the euro. This is seen as the fairest method because the states have already agreed these rates.

Thus, if we are going into the single currency, the pound would have to fall close to its central rate and interest rates would have to fall much closer to German levels, by the end of next year.

However, as the entrants to the currency will be announced next April, the Government and the Central Bank are keen that much of the movement would be achieved beforehand.

Low inflation in recent months has also proved beneficial. While the Central Bank is holding out firmly against a rate cut this year, this could prove difficult if sentiment about monetary union finally turns and money flows into the bond market.

In the short-term the authorities are still hoping that the strength of sterling will prove temporary. A fall in the pound's value to as low as 90p might not prove inflationary, if the decline was shortlived. Nevertheless, the Central Bank has been intervening modestly in recent weeks by selling pounds in its attempt to push the currency lower.

The Bank is hoping that the market will help push the pound lower in the ERM band. It is certainly keen not to see much more of a rise against other currencies likely to form part of the initial wave of entrants to monetary union.

But Dr Dan McLaughlin, chief economist at Riada Stockbrokers, warned that falling interest rates and a declining currency will in itself prove inflationary.

"People may have a false sense of security about inflation," he said. "But that is, not to say it will not come through."

He added that recent foreign selling of the bond market has been provoked by fears that the pound will fall back closer to its central ERM rate.

The Government and the Central Bank hope that the outcome of the British election would produce an end to sterling's bull run. If not, their dilemma can only worsen in the months ahead.