Value of the Irish Pound, Irish Times, 31 May, 1994
The Central Bank, through high interest rates, is keeping the Irish pound high in value and making life difficult for the economy.
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Why is a macho Irish pound bad for a fledging Irish economy?
Because a strong Irish currency makes our exports uncompetitive in Europe, and interest rates, while a lot lower than in the Glory Days of the currency crisis, are still too high compared to our rate of inflation and compared to US interest rates. Such rates are a further brake on the Irish economy. The US short-term interest rate is still only 3.75% whereas our Central Bank short-term rate is 6.25%
The fact that share prices on the Irish Stock Exchange took a considerable drop recently is also an indication that interest rates are too high. The high rates are for the sole purpose of propping up the value of the Irish Pound; there is no danger of inflation at the moment.
For over six months now, the Irish Pound has been at the top of the EMS band, ahead of such strong currencies as the Dutch Guilder and the German D-Mark. Briefly, a couple of months ago, it slipped behind the D-Mark but it is now forging ahead again. If during this period, the Irish short-term interest rate had been a couple of percentage points lower, down around four per cent, the value of the Irish Pound would have been closer to 90 p Sterling than the 97 p around which it has been hovering recently.
The same erroneous policy, which had such disastrous consequences during the currency crisis, is still being stubbornly pursued by our Central Bank. Perhaps someone can tell me why.
Current comment
Had the currency and interest rates been maintained at a lower level after the devaluation the pickup in the economy might have occurred sooner and the lead-in to our current boom economy would have been slower and more manageable. There would have been time to take corrective measures and maybe the rise in house prices, with such undesirable social consequences, might have been less. Improved training and educating of the labour force could have been provided on a gradual and more planned basis. (7/9/98)
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Published, Irish Times, 31 May, 1994.
I would like to take up a few points in your editorial if May 25th, headed "A Strong Pound". You made the point that the strength of the Irish pound was due, or at least partially due, to the attractiveness of Irish gilts resulting form the weakness of Sterling and the American dollar. Is this not a circular argument?
The Irish pound is artificially high because of our high interest rates. Those same high interest rates are also depressing the price of our Irish gilts, and so making them attractive to foreign buyers. If, as may happen in the near future, the Irish Government is forced to reduce interest rates, the consequent rise in the price in Irish gilts will, discounting any drop in the value of the Irish pound, provide a nice profit for those wise foreign investors.
You state, as the Central Bank’s view, that it is largely up to the market to set the currency’s value. It may be up to the market, but the market works within the ground rules set by the Central Bank, one of which is interest rates.
I thought, at the time, that last year’s devaluation should have gone 15 instead of 10 per cent. This would have put the value of the Irish pound at 95 p Sterling. I still think that it should be kept between 90 p and 95 p Sterling, or around 2.30 Deutsche Marks, if the weaker parts of the Irish economy are not to go under and if people are to be encouraged to set up and to succeed with new enterprises. The commercial world is competitive enough at the moment, without our state bodies putting obstacles in the way of people trying to succeed.
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