In his first interview since becoming Central Bank boss, John Hurley tells Siobhán Creaton, Finance Correspondent, that financial control does not just reside in Frankfurt

John Hurley is the only man in Ireland who could definitively tell you whether your mortgage repayments will be getting cheaper in the weeks and months ahead. If you ask he will give you a firm "no comment" but that won't stop analysts and commentators from parsing his economical utterings for a clue about the European Central Bank's next move.

As governor of the Central Bank of Ireland he is also a member of the ECB's governing council which meets twice a month in Frankfurt to discuss and decide on the appropriate interest rates for the euro-zone states.

He settled into his seventh floor office in Dame Street in March this year succeeding Maurice O'Connell in one of the most powerful jobs in the Republic and in Europe.

"It is absolutely fascinating for me to be involved in the business of the money supply and the whole question of having an independent economic overview of the economy," he says.

The most important issue for the Republic is to present an image of a country that is capable of managing its affairs and managing its economy, according to the governor.

This is the critical factor when attracting foreign investment to the Republic that is crucial to underpinning a strong economy.

"I am encouraged by the determination of the Government to bring public expenditure levels more into line with the level of resources in terms of taxation. It is important that we would be seen to be managing our affairs well. Foreign direct investment came here because we were seen to be people who managed our affairs well and that the action being taken will secure that going forward."

The Central Bank is still taking a fairly optimistic view about the rate at which the Irish economy will grow this year, forecasting growth of 3 per cent.

Earlier this week, Davy Stockbrokers, revised its more bearish forecasts suggesting that the economy would grow by just 0.7 of a percentage point in 2002.

Mr Hurley says the Central Bank has cautioned that there may be some risks on the downside in its forecasts chiefly the weakening world economy but is broadly satisfied to leave them be for now.

"We still believe that we will have growth of 3 per cent this year with some risks on the downside. We are not doing badly in the context of the international climate. There has been significant weakness in the US and in Europe. We are a small open economy and we have to trade in that environment." He also notes the risk of a war in the Middle East which would have an immediate impact on oil prices.

There are also internal risks that have the potential to depress economic prosperity, chief among these is price inflation. This is a major concern particularly as Irish inflation is double the European average. The governor says there are many reasons for this outcome and is concerned about this trend.

"We had a weak euro for a very long time therefore we imported quite a bit of inflation. We had very strong growth putting pressure on different sectors of the economy. We had a significant improvement in employment that put pressure on pay, particularly in the services sector. On top of that we had a monetary policy that was probably a little loose for the country that was necessary for Europe in general. Fiscal policy would also have been expansionary."

Now that interest rates and other aspects of monetary policy are set in Frankfurt rather than in Dublin the options open to the Government in terms of combating inflation are fewer. The governor points out that there is still much that can be done to tackle this problem.

The next opportunity will manifest itself in the forthcoming negotiations on a new national wage agreement.

Mr Hurley will take more than a passing interest in the manoeuvring around a new pay deal having been the Government representative at the Programme for Prosperity and Fairness deal. He says it would be inappropriate to comment at this sensitive time but feels it is his duty to set the broad parameters within which the talks should be framed.

The Central Bank is forecasting that inflation will be about 4 per cent next year and expects that factors such as slower economic growth and the strengthening euro will help to push it lower.

"Crucial things within our own control include decisions with regard to pay and the other aspects of competitiveness, increased vigilance by the consumer in terms of prices and also competition is very important. The challenges here are to try to ensure that inflation doesn't increase."

The new governor is also at the centre of the establishment of a new regulatory structure that is due to be put on a statutory footing early next year. An interim Irish Financial Services Regulatory Authority (IFSRA) has already been set up and is putting the structures in place to ensure a smooth transition.

The Government had moved to restructure the Central Bank with a primary focus on enhancing the protection of consumers in their dealings with financial institutions. Following much wrangling the complex and diverse structure that is IFSRA was born.

The governor of the Central Bank emerged as the all-powerful supremo who will retain overall responsibility for all regulatory matters with IFSRA's independent board reporting to him.

"The authority should be up and running by about February. The legislation will determine the role of the authority and that is going to be entirely respected. Where the connection comes with the Central Bank is through financial stability and the health of the financial system in general and the systemic effect that this might have for the economy as a whole. That is the role of the Central Bank, it is the role of the European Central Bank and what you have then is appropriate linkages with the authority while respecting its independence," he explains.

Earlier this week Dr Liam O'Reilly, a director general of the Central Bank, was appointed as chief executive of IFSRA. There were some wry smiles around when his appointment was announced with the Central Bank once again emerging victorious in retaining control of the new structure.

Mr Hurley says this is unfair. None of the Central Bank board members was involved in the selection process that attracted a wide number of candidate from the Republic and abroad.

"It would be a bit unfair simply because in a very independent competition a candidate like Dr O'Reilly emerged as the best candidate. The fact that he would have come out on top of that just means that he is a very good person, very professional and very skilled."

Mr Hurley has been working very closely with IFSRA chairman, Mr Brian Patterson, to create the new structure.

"There was a view that we needed to give more emphasis to consumer matters. This is clearly set out in the legislation. Brian Patterson has made it absolutely clear that is going to be a key role of the authority. Liam O'Reilly has made the same point. I wouldn't underestimate the amount of work that is going on to ensure that this works well." Mr Patterson is also chairman of the Irish Times Ltd.

The most important task is bringing all of the different components together within the authority which will include a registrar for credit unions and staff from the Department of Enterprise, Trade and Employment, who regulate the insurance industry.

"Arrangements have been put in place to ensure they all come together to form this new authority. It is crucial that while all of this is happening that the bread-and-butter issues of regulation continue," according to the governor.

Evidence that that is the case can be gleaned from the shot across the bows of mortgage lenders this week when the governor warned them to be prudent and not to allow customers to take on excessive amounts of debt.

The Central Bank can ultimately curtail the amount of money being lent out by the financial institutions although this would be a measure of last resort. By writing to the chairmen of the major financial institutions, Mr Hurley is firmly telling them to stick to the guidelines so as not to store up trouble for themselves and their customers in less bountiful times.