The value of the pound is set to fall again today after the Central Bank's key annual monetary policy statement offered little to protect it from further selling pressure.
The Bank's statement made no direct reference to a revaluation, speculation about which has increased the volatility of the currency. As a result, it is unlikely to stem the losses which the pound has suffered in recent days.
It warned, however, of the inflationary effects of rising property prices and indicated its belief that interest-rate cuts brought on by monetary union should be delayed as long as possible.
The pound fell to a nine-year low against sterling of 84p yesterday and declined in value against the deutschmark and the dollar as speculators bet that the Minister for Finance, Mr McCreevy, would not order a revaluation in the run-up to EMU.
The Irish stock market closed at record levels again yesterday, surging by 1.6 per cent on Monday's 3.35 per cent gain to close at an all-time high of 4,259.45 despite a weak international backdrop. Financial shares were again the main movers as Irish Life, AIB and Bank of Ireland continued to move into record territory.
The Central Bank in its statement said the rate of house-price rises had been unduly high and warned there was "substantial international evidence" that asset price booms contributed to inflation and might disrupt economic growth and cause distress to both lenders and borrowers.
It said the rises had been caused, at least in part, by ready availability of affordable mortgage credit and warned it was continuing to monitor the lending practices of credit institutions.
The Bank admitted that inflation so far had been below expectations and conceded it could do little to deal with the threat of a significant upturn other than to continue to monitor mortgage lending carefully.
Under normal circumstances, the combination of a falling currency and rampant house prices would lead to interest-rate rises. However, in this extraordinary year leading to monetary union, the Bank had to admit that interest rates were set to decline significantly as this country converged with its European partners.
The Bank did not go so far as to set out a timetable of rate cuts over this year. It stressed that the strength of the economy justified caution.
Mr Jim Power, chief economist at Bank of Ireland, said the Bank would like to hold off any rate cuts for as long as possible. However, according to Dr Dan McLaughlin, chief economist at Riada Stockbrokers, this might not be possible. "If the pound falls to lower levels which the market believes are sustainable, then rates will be forced down as buyers rush into the currency," he said.
"This is a unique situation because there is a floor under the currency and it cannot fall below its central rate at DM2.41, and if the pound has fallen there is no justification for rates to be any higher than German levels which are currently 3.3 per cent."
The Labour Party finance spokesman, Mr Derek McDowell, called on Mr McCreevy to break his self-imposed silence on exchange-rate policy. Mr Power insisted that some sort of direction was needed. "What the markets and the economy needs is a clarification from the Minister," he said.