THE Central Bank has sounded a clear warning about the risk of a pick-up in inflation and indicated that it will not be slow to increase interest rates later this year if necessary.
Irish interest rates are still expected to follow German interest rates downwards over the coming weeks, but the Central Bank statement shows it will consider pushing up interest rates later in the year if inflationary pressures emerge.
The Central Bank's annual monetary policy statement warns that "low inflation this year may lead to complacency about inflation as the year progresses and into 1997".
As the outcome for 1997 will be used to assess which states are eligible to participate in economic and monetary union, this would be of particular concern to the Central Bank.
With this in mind, the bank warns that if increases in credit growth remain high and if other inflationary pressure emerge, "there would be a need to tighten monetary conditions" - in other words increase interest rates.
The Bank's statement is, however, not being seen in the market as an indication of an early increase in rates but rather a warning of its determination to control inflation moving into next year.
The statement, issued early each year by the Bank, warns that "it is noteworthy that we are no longer among the group of (EU) countries with very low inflation".
Inflation this year is expected to be 2.3 per cent, it says, but this is partly due to the favourable impact of the abolition of university fees and lower interest rates.
Factors which could push up inflation, according to the Bank, include Government tax and spending policy, tight conditions in some areas of the jobs market and strong overall demand.
The Bank's monetary policy is focused mainly on the pound's exchange rate and on ensuring Ireland meets the Maastricht criteria.
A key indicator for the Bank is the growth of private sector borrowing from banks and building societies, which was running at 11 per cent late last year, a rate which "may well continue into the early months of this year".
This is above the growth in the economy in general and the bank warns that if this continues and if wage and price developments indicate inflationary pressures, it will have to act.
With the Bundesbank expected to cut interest rates over the coming weeks, the Central Bank is likely to sanction one further cut in its short term facility rate.
Commenting on the statement, Mr Austin Hughes of Irish Intercontinental Bank said rates should fall along with German rates and there was no reason to expect an early rise thereafter.
