THE pound has fallen to parity against sterling for the first time in 18 months, as expected Central Bank intervention to support the currency failed to materialise.

At one stage in the early afternoon the pound traded at 99.95p sterling before recovering marginally to close at loop. The falls will be welcomed by Irish exporters but could, if sustained, threaten inflation by increasing the price of imports from Britain.

Sterling has been rising since a quarter point British interest rate rise boosted the currency across world markets. On Wednesday, the Central Bank intervened and managed to hold a floor under the currency at 100.2p. Yesterday sterling remained firm against the deutschmark and the pound fell further against the British currency.

The Central Bank failed to intervene, allowing the pound to fall against sterling and also drift lower against the D mark, bringing the currency back within the old 2.25 per cent narrow ERM band. The old band is no longer in operation, but is believed to still be a target for EU central banks.

The selling momentum simply kept up as people saw the pound going down, Mr John Beggs, chief economist at AIB said. "The market simply has a short term relationship in mind."

Mr Beggs added that a move below parity would have a big psychological impact, but he questioned how quickly it would feed through to inflation.

Other analysts were far more vocal. "The Central Bank is taking risks with inflation similar to the UK Chancellor Nigel Lawson in 1987," said Dr Dan McLaughlin.

"That triggered an inflationary boom and we could go the same way if the currency is not allowed to rise."

He added that recent Central Bank selling to reduce the value of the pound had been misguided and even dangerous. He pointed out that the actual bands in the ERM are 15 per cent and not the 2.25 per cent notional band the authorities have been trying to stick to.

According to Mr Beggs, the notion that the pound is capped against the D mark serves to produce selling pressure around the limit of 2.4660 marks.

Mr Jim Power, chief economist at Bank of Ireland, also called for the Central Bank to defend parity. "The Bank should certainly stop selling the pound against the Dmark. They should simply let it rise; the last thing the Central Bank should do is allow inflation to be threatened."