The governor of the Central Bank, Mr John Hurley, has warned that growth will remain slow in the euro zone even after current geopolitical tensions are dissolved.
Mr Hurley said it was not yet possible to assess conclusively the implications of the US-led war on Iraq for the euro zone but acknowledged that it had contributed to a weakening in global economic growth prospects.
Addressing a conference hosted by Finance Dublin, he predicted that the Irish economy would grow by less than 2 per cent this year in GNP terms, adding that there was "downside risk" to the forecast.
"With business and consumer confidence indicators quite weak, it is unlikely that there will be much of a recovery in domestic spending in the short term," Mr Hurley said.
He added that the external environment called for "prudent policies" on public expenditure, which he believed must be brought back to a "sustainable level".
"It should be contained to the 7 per cent planned for this year.This will help to limit domestic inflationary pressures. It would also limit the damage to our competitiveness in the event of a sharp appreciation of the euro," Mr Hurley said.
A "concerted effort" will be required if Irish inflation is to be brought closer to levels recorded in other euro-zone states, according to the governor. He said he welcomed the anti-inflation measures contained within the proposed national partnership agreement.
"The excess inflation over that of our euro-area partners is largely a services sector phenomenon," Mr Hurley said.
He also referred to the bank's "continuing concerns" on residential and commercial property lending, noting that economic uncertainty had not dented borrowers' enthusiasm for taking on mortgage debt.
The governor indicated the Central Bank would expand on the issue of mortgage lending in its Spring Bulletin, which is due for release today.
Noting that the global economy was passing through a period of "exceptional uncertainty", Mr Hurley said the European Central Bank remained "ready to act" if developments in Iraq required the injection of additional liquidity. He said the economic impact of the war would depend on the extent and duration of the conflict.
His comments were echoed yesterday by Austria's central bank governor, Mr Klaus Liebscher, who was addressing a banking seminar in Prague.
"In times of severe tension, it is of the utmost importance that policymakers do not lose sight of their responsibility, so as to reduce uncertainty and strengthen confidence," he said.
(Additional reporting, Reuters)
