THE pound has moved closer to the top of the ERM band, as it continues to rise in tandem with sterling, leading to further difficulties for the Central Bank on the markets. The Irish currency traded at almost 11 per cent above the French franc yesterday, moving closer to the 15 per cent ceiling and its movements are now being closely watched by the Republic's EU partners.

The continuing rise of the pound against the core European currencies places the Central Bank in a dilemma, as it may come under pressure to allow interest rates to fall to weaken the currency.

The pound's movements are now being monitored very closely by the Central Bank. The European Monetary Institute - the forerunner to the EU central bank - is also monitoring the currency's movements.

Under new rules introduced after the currency crisis in 1993 the pound is allowed to move to 15 per cent above the weakest currency in the system.

While it still has just over 4 percentage points to go before the European central banks are obliged to intervene, the current levels are fast coming uncomfortably close to the top of the band.

The Bank will be very reluctant to allow the pound to move much above its current level, for fear that speculators would move in and try to force the pound above the ceiling, knowing they would be able to make large profits.

The volatility of the pound is also being closely monitored by the EMI in Frankfurt, according to sources. The sources say that the pound's volatility is unlikely to be used as a reason for refusing Ireland entry to monetary union.

They add, however, that some senior German officials and central bankers believe that the pound's close relationship with sterling means that it would be prudent for Ireland to delay its entry to EMU until Britain is ready to join the single currency.

Some believe that Ireland could be offered a deal to stay out of monetary union for a couple of years, in return for further EU funding.

But the sources stress that if the Irish authorities remain adamant that they want in, Ireland will most probably be allowed to go ahead, as at the moment it clearly meets the Maastricht criteria.

The Irish authorities have not been approached with any proposal to delay Irish entry and remain determined that the Republic will join with the first group in 1999.

The current problem for the Central Bank is that it will need to sell large amounts of pounds if it is to drive the pound down against the deutschmark. That would increase liquidity in the money markets - driving interest rates down in the process. Some analysts believe that could happen in a matter of weeks.

Mr Dermot O'Brien, chief economist at NCB Stockbrokers, said the Bank is trying to run two inconsistent policies. "The position is ultimately untenable," he said. "You simply cannot cap the currency and keep interest rates high over the long run. The market will be swamped and money market rates will fall back."

For the moment the Bank will be reluctant to allow interest rates to fall back at least until the first inflation figures for the year come through.

Mr Oliver Mangan, chief economist at Goodbody Stockbrokers, says the Bank is likely to be less concerned about falls in the second half of the year.

"The Maastricht criteria is an average over the year," he notes "So if the numbers come in low at the beginning of the year and pick up at the end of the year that would not be disastrous."