The Central Bank continues to face problems on the currency markets. The crux of its difficulties is that the pound is being pulled up in sterling's wake against the other ERM currencies. This has left the pound detached in the ERM band from the currencies with which we hope to enter monetary union. The Government and the Central Bank will be uncomfortable with the way the pound is tracking sterling on the markets, although there appears little they can do about it.
The Irish currency is now approaching the top of the ERM band. It was around 11 per cent above the weakest currency yesterday and the limit is 15 per cent. A further rise in sterling could pull the pound uncomfortably close to the top of the ERM band.
When the existing 15 per cent bands were established after the 1992/93 currency crisis, it was thought that they would effectively allow currencies to float freely. But the pound's recent rise has brought the top of the band within reach. Sterling's rise may be nearly over which would offer welcome relief to the Irish authorities - but if the British currency takes another spurt, then the authorities here may be called on to intervene and sell pounds on the market to stop it moving above the top of its permitted rate. They might also come under pressure to reduce interest rates, despite the strength of the economy.
The pound's recent rise underlines the link in the minds of investors between the Irish currency and sterling. Sterling has risen due to speculation about rising British interest rates, optimism over the outlook for the British economy and, more recently, some nervousness about monetary union.
The performance of the currency is being closely monitored by the European Monetary Institute (EMI) in Frankfurt. The EMI is the forerunner to the European Central Bank. Provided the pound does not breach the top of the ERM band, then it's performance should not exclude Ireland from meeting the Maastricht rules. And the Government here can point to Ireland's excellent performance in terms of the other criteria, which leaves us one of the best qualified to meet the single currency criteria.
Sources suggest that some senior German officials and central bankers are closely monitoring the performance of the Irish currency. When the time comes to decide who joins monetary union, they are likely to ask the Government whether they believe that the pound should enter monetary union without sterling. If this happens, the response of the Government is likely to be that we meet the rules and intend to join in the first wave, and we would be quite entitled to make this case. At this stage, there is nothing to suggest that Ireland will not be able to join with the first group moving to monetary union in 1999.
But the pound's recent volatility does underline a key policy consideration for the Government here, which is how we would cope once inside monetary union with volatility in the currency of our major trading partner. Considerable work remains to be done in this area, as it does in the general preparation for monetary union both by Government and by business. Public education on the issue also needs deeper consideration.