The Central Bank has predicted the Irish economy will grow at a rate of approximately 5.5 per cent this year, fueled in part by the expected spending boom after the remaining SSIAs mature.
In its quarterly economic bulletin the Bank also warned the Government to bring rising prices under control. The economy is under increasing threat as Ireland now tops the table of the most expensive countries in Europe, economists stressed.
Private borrowings are also the highest across the continent with mortgages making up four-fifths of new credit last year. In its quarterly report, the Central Bank said it may now be necessary to cut inflation levels below other EU member states.
But it said the outlook remained generally good with the economy expected to grow by 5.5 per cent this year, slightly less than last year. The Central Bank noted that prices shot up by 4 per cent last year, as measured by the Consumer Price Index.
"The outlook for 2007 is good; the euro area economy is expected to continue to grow around potential, although quarterly growth rates may show some volatility."
Higher mortgage interest repayments were a major factor in the inflation rate increase, it said. It cautioned the rise was posing an increasing risk to the country's competitiveness with other EU member states.
A Central Bank spokesman said: "It is important that domestic policies focus on containing inflation, and, in particular, eliminating the inflation differential between Ireland and the euro area."
The report was a timely reminder to the Government of its responsibilities, according to Fine Gael Deputy Leader and Finance Spokesman Richard Bruton.
"Ireland is not invincible and cannot substitute a booming property sector for the weakening export performance," he said. The Central Bank called for a number of measures to control rising prices, including more competition in certain areas.
It said there was a welcome easing in house price rises since last summer, with prices now levelling off. Demand for property remained strong but was offset by six interest rate hikes last year and the construction of around 90,000 new homes.
In its bulletin, the bank said although underlying demand factors for housing remained strong, their impact has been tempered by six increases in interest rates since December 2005 together with a high housing output - an estimated 90,000 units completed last year.
But it warned that despite the interest rate rises the demand for credit in Ireland remains strong and that Ireland's private sector credit to GDP ratio was now the highest in the euro zone area.
"This is clearly linked to the high volume of housing output in the past few years. Property-related lending has accounted for about four-fifths of the increase in credit over the past year," it said.
The Central Bank said that residential mortgage borrowing had pushed personal sector credit to almost one-and-a-half times personal disposable income at end 2006.
It noted that affordability is increasingly becoming an issue, especially for first time buyers.
"If, as might be expected, the number of new houses built decreases over time and house price inflation recedes, increases in credit could be expected to ease significantly," it said.
The increase in consumer prices in 2006, as measured by the harmonised index of consumer prices (HICP), came to 2.75 per cent, with a forecast average HICP rate of 2.5 per cent in 2007 .
It said it was encouraged that domestic demand was making a greater contribution to economic growth in the euro zone.
The bank also pointed out that global headline inflation rates had declined in the latter part of 2006 thanks to lower energy prices, while core inflation rates had also remained subdued as moderate wage growth reduced the pressure on companies to pass on higher costs to consumers.
Additional reporting PA
