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Central Bank and Financial Services Authority of Ireland

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Banc Ceannais na hÉireann or the Central Bank of Ireland is the central bank of the Republic of Ireland which had control of the issue of Irish banknotes and coins. Since the introduction of the euro currency, it is an agent for the European Central Bank. The bank became the banker of the Irish Government on January 1, 1972 in accordance with the Central Bank Act, 1971 (http://www.irishstatutebook.ie/1971_24.html) thus making complete the transition of the bank as a currency board to a central bank; this power as the governments banker was taken from the Bank of Ireland, one of the countries largest banks.

The bank has been called, since 2003, the Central Bank and Financial Services Authority of Ireland or in the Irish language: Banc Ceannais agus Údarás Seirbhísí Airgeadais na hÉireann. This is to reflect its new role in the financial industry and the economy.

The bank is primarily located on Dame Street in central Dublin and the Currency Centre, Sandyford.

Contents

Origins of the Central Bank

On the independence of the Irish Free State in 1922, the new state's trade was overwhelmingly with the United Kingdom (98% of Irish exports and 80% of imports in 1924), so the introduction of an independent currency was a low priority. British banknotes (British Treasury notes, Bank of England notes, and notes issued by Irish banks all circulated, but only the first were legal tender) and coins remained in circulation.

Under the terms of the Coinage Act 1926, the Finance Minister was authorised to issue coins of silver, nickel, and bronze of the same denominations as the British coins already in circulation - however the Irish silver coins were to contain 75% silver as compared to the 50% silver coins issued by Britain at the time. These coins entered circulation on 12 December 1928.

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Series A (1928-1975) and B (1976-1992) £5 notes

Under the terms of the Currency Act 1927, a new unit of currency, the Saorstát Pound (Free State Pound) was created, which was to be maintained at parity with the British Pound Sterling by a Currency Commission which would keep British government securities, sterling cash, and gold to keep a 1-1 relationship.

The Central Bank

The Central Bank Act 1942 which came into effect on 1 February 1943 renamed the Currency Commission the Central Bank of Ireland, although the organisation did not at that time acquire many of the characteristics of a central bank:

  • it was not given custody of the cash reserves of the commercial banks
  • it had no statutory power to restrict credit, though it could promote it
  • the Bank of Ireland remained the government's banker
  • the conditions for influencing credit through open-market operations did not yet exist
  • Ireland's external monetary reserves were largely held as external assets of the commercial banks

This seriously limited the banks' ability to run an independent monetary policy. The Central Bank broadened its activities over the decades, but it remained in effect a currency board until the 1970s.

Decimalisation

The 1970s were a decade of change, which began with the decimalisation of the currency which came into effect on 15 February 1971, when the decimal coinage was released into circulation (although 5p, 10p, and 50p coins were released a few years earlier, as they had exact equivalents in old currency units). Decimalisation would have provided an ideal opportunity to break the link with Sterling, but there was not much demand for this at that time. In 1972 however, the Bretton Woods system of fixed exchange rates broke down, and in the wake of the 1973 oil crisis inflation in Britain increased dramatically, and economic theory would suggest that a smaller economy whose currency is pegged to a larger one will suffer the larger economy's inflation rate. At the same time moves to create a money market in Dublin and the transfer in 1968 of the commercial banks' sterling assets to the Central Bank made it possible to contemplate a break in the link. In the mid to late 1970s, opinion within the bank was moving toward breaking the link with sterling and devaluing the Irish currency in order to limit inflationary effects from abroad.

At this time, however, an alternative option became available. In April 1978, the European Council meeting in Copenhagen decided to create a "zone of monetary stability" in Europe, and European Economic Community institutions were invited to consider how to create such a zone. At the following Council meeting in Bremen, Germany in June 1978 the basic features of the European Monetary System were outlined, including the creation of the ECU - European Currency Unit, a basket of the Community's currencies used to determine exchange rates, and the forerunner of the euro.

The European Monetary System

The Irish government had to decide whether or not to participate in the EMS. If the EMS had included all the European Community's currencies, it would have provided stability for 75% of Ireland's external trade, but in the event Britain, which still accounted for 50% of Ireland's external trade, decided to stay out of the EMS. Despite this, on 15 December 1978 it was announced that Ireland would participate in the EMS. Countries were given the option of either a 2.25% or 6% margin of fluctuation within the EMS' Exchange Rate Mechanism (ERM), and Ireland took the narrower margin. The EMS started on 13 March 1979, and towards the end of the month Sterling started to gain in value against the EMS currencies because of rising oil prices, and by 30 March Sterling breached the upper fluctuation band limit of the Belgian franc and the Irish currency could no longer track Sterling. After over 50 years, the parity of the Irish and British currencies was broken, and the Irish currency became known as the Irish pound (or Punt).

The initial experience of the EMS was disappointing. It had been expected that the Irish Pound would appreciate in value against Sterling, and hence reduce inflation in Ireland, but in practice Sterling appreciated considerably in value thanks to its status as a petrocurrency and to the tight monetary policies of the new British government of Margaret Thatcher. By late 1980 the Irish Pound had fallen in value to less than 80 British pence, and Irish inflation was higher than British. Economic policy in Ireland was inconsistent with a 'hard currency' policy, and the Irish Pound also failed to hold its value against the central rate of the Deutschemark, although it did appreciate in value against some of the other EMS currencies.

Eventually the EMS settled down (notwithstanding a crisis in 1992 when the Irish Pound was devalued by 10%), and Irish inflation was consistently the same or lower than Britain's inflation rate from 1987 onwards.

Towards the Euro

The idea of a single European currency goes back to the Schumann Plan of 1950. The first blueprint for how to go about implementing the currency, the Werner Report of 1970 was not proceeded with, but the ultimate aim was always kept in mind. The Delors Report endorsed by the Madrid Summit of June 1989 envisaged a three-stage process to monetary union, and this was given legal authority by the Maastricht Treaty of 1992 (enacted into Irish law as the Eleventh Amendment to the Constitution of Ireland by 70% of those voting in a referendum on 18 June 1992). This envisaged the start of monetary union on 1 January 1999 and the introduction of notes and coins on 1 January 2002.

The Central Bank began production of euro coins in September 1999, producing over a billion coins, weighing about 5,000 tons, with a value of 230 million euro before the introduction into circulation of the euro coins in January 2002. Production of euro banknotes began in June 2000, with 300 million notes worth 4 billion euro being produced in denominations of 5, 10, 20, 50, and 100 euro. Euro banknotes produced for the Central Bank are identified by having the serial number begin with the letter T. The Central Bank did not print any 200 or 500 euro notes, but obtained a small stock of those denominations from other European countries.

See also

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