THE pound has continued its gallop at the top of the ERM and, gaining over two pfennigs against the deutschmark yesterday.

It is now above the floor of the old-ERM band - DM2.6167 - in force before the currency crisis.

At one stage the pound was trading over 10 per cent above its central rate - the maximum it is allowed to go is 15 per cent.

At the same time it remained below 98p against sterling despite Central Bank intervention, closing at, 80p from 97.93p a day earlier, and at DM2.6328 from DM2.6130.

The Central Bank intervened on Thursday as the pound fell below 8p, but despite significant buying, it failed to bump it back over 98p.

Mr Jim Power, chief economist at Bank of Ireland, said the low levels against sterling are worrying from an inflation standpoint. "Sterling is far more influential for inflation than the trade-weighted index," said Mr Power. "And this year the authorities cannot afford to take any risks. If we are to qualify for Maastricht, inflation cannot be allowed to go many higher than 2.5 per cent."

Over the past week, the mark has sunk to four-year lows against sterling, as well as almost three-year lows against the deutschmark.

While the moves place the Central Bank in a dilemma, it is not alone.

The Finns have also been intervening, along with the Spanish and Portugese, in a vain attempt to prop up the deutschmark. The Spanish even attempted a rate cut, but failed to weaken the peseta.

The mark is unlikely to stage a recovery until there is some evidence of German economic recovery In the meantime another rate cut looks likely.

"That would be very bad news for the Irish pound," said Mr Power.

A fall in Irish producer prices in December had little effect on the currency. Irish output prices for the manufacturing industries fell 0.1 per cent in December and were down 1.5 per cent from a year ago.