The broad picture for the Irish economy is generally good, despite a high degree of uncertainty in the international economy, the Central Bank says
Publishing its fourth Quarterly Bulletin of 2005, the Central Bank is forecasting GNP growth for 2005 of about 4.5pc (GDP 4.25pc) and expects growth to continue at a broadly similar pace in 2006.
The bank said domestic demand growth has been quite strong recently and the growth in personal consumer spending has picked up somewhat.
However, it expressed concern about high and volatile oil prices and growing global imbalances create risks that may impact on exchange rate movements, such as a sharp depreciation of the dollar against the euro.
"These could lead to substantial competitiveness pressures against a background in which Ireland has already experienced a deterioration in this regard in recent times."
The bank said HICP inflation remains quite low and stable and is expected to average around 2.25pc this year, with a modest increase to around 2.5pc expected next year.
"This environment of reasonably low inflation has been achieved despite sharply rising oil prices, strong employment growth and some pick-up in private consumption growth."
However, the Central Bank reports that the rise in oil prices during 2005 is exerting some upward pressure on prices.
"Although the Irish economy is operating in a low inflation environment at present, the need to ensure that domestic inflationary or cost pressures do not re-emerge to threaten the maintenance of competitiveness is very important. Recognition of this must be reflected in price and wage setting."
It also called for public finances to be prudently managed in order to avoid incurring a significant deficit as a result of the possible adverse shocks that might hit the economy.
The bank welcomed the gradual easing in house price inflation although it still remained fairly high, while the continuing strong rate of credit growth remains a concern.
Global economic growth continues to be robust, with world output projected to grow in excess of 4pc this year and next, the bank said.
Central Bank cuts growth forecast for 2005
Central Bank warns of risks of both inflation from high oil prices and exchange rate volatility