DUBLIN, Jan 10 (Reuters) - The recent weakness of the pound against the euro is causing difficulties for Ireland and the currency's drop is effectively a "devaluation", Irish Finance Minister Brian Lenihan said in a newspaper interview.
A lower sterling, which has made a recovery from the sharp moves that took it close to parity with the euro at the end of last year, has hurt Ireland's open economy as the U.K. is a key trading partner. On Thursday, the Bank of England cut interest rates by 50 basis points to a record low of 1.50 percent in an attempt to shore up the UK economy.
"The fall in sterling is causing us immense difficulties," Lenihan told the Irish Independent in an interview published on Saturday.
"They have in effect produced a devaluation of the pound through expansion of the money supply. That has put us under immense pressure," he said.
Irish business group ISME said last month the weak pound has had a "disastrous" impact on exports to the UK. Shoppers have flocked across the border to Northern Ireland which has also hit retail trade in the Republic of Ireland.
"It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of a weapon," Lenihan said.
The former "Celtic Tiger" has suffered a stunning reversal of fortune as a domestic property crash and global slump plunged its economy into recession, forcing the state to bail out the three largest banks and borrow heavily to fund spending.
The finance ministry said late on Friday gross domestic product was predicted to contract 4.0 percent this year, from an 0.8 percent drop forecast at budget time in October, making it the country's worst recession on record.
The finance ministry estimated GDP declined 1.4 pct in 2008.
GDP was predicted to fall 0.9 percent in 2010 and only rebounding to 2.3 percent growth in 2011.
Lenihan has been holding talks with trade unions and business leaders to try to squeeze spending and has vowed to take further action to stabilise public finances.
"It can only be a matter of weeks -- we can't wait any longer. We have got to chart a corrective pathway out of this situation," he told the Irish Independent.
Lenihan said the government had to show it was determined to deal with the issue.
"It has got to be dealt with through both public sector pay and numbers," he said.
(Reporting by Jonathan Saul, Editing by Peter Blackburn)