The Central Bank may have cut its estimate for growth in Gross National Product this year to 6 per cent but it remains optimistic in its economic prognosis. Nevertheless, even the revised growth figure remains above what the Bank believes is sustainable. In other words, continuing growth of 6 per cent is likely to boost underlying inflationary pressure, or at least that part of it which is generated at home.

Continuing growth at this rate will also exacerbate labour market shortages, possibly leading to further wage price inflation. And it is wage inflation which continues to worry the Central Bank.

In a special chapter on financial stability in Ireland - within the annual report - the Bank points out that one of the main concerns is the combination of wage inflation and a possible short, sharp depreciation in the dollar.

The author of the chapter, Mr Frank Browne, who has returned from a stint at the ECB in Frankfurt, argues that if this were to occur - particularly if it was accompanied by a weakening of sterling - it would exert considerable pressure on the profit margins of many firms. Worryingly he also points to significant repercussions for the ability of some highly leveraged borrowers to continue serving their loans.

However, the conclusion is that no significant risks to stability are evident at present and the overall financial situation is quite favourable.

The methodology used in compiling this chapter is far more wide ranging than the old system of simply stress testing the banks. It takes the economic background in the US and Japan into account as well as the domestic economy and lending patterns and practices of the banks.

The Central Bank also points to its more customary concerns, particularly inflation which it expects to average 4.5 per cent this year. The governor Mr Maurice O'Connell points out that this may not be at the top of the EU league, particularly if the harmonised rate is considered, but should still be a cause for concern.

Inflation is not simply the result of a rapidly growing economy in a monetary union, according to Mr O'Connell, who said he disagreed with recent analysis by economists such as the Nobel Laureate professor Robert Mundell.

Mr O'Connell refused to be drawn into any comment on the latest proposals by the Commission for the management of the Irish economy, stating only that the Bank would have a view once the proposals are finalised.

The Bank remains concerned about the growth in private sector credit. According to data it released yesterday, this fell to 15.8 per cent in March from 18.2 per cent in February, its weakest level since February 1997.

Mortgage lending also fell back slightly to 22.3 per cent from 22.9 per cent a month earlier, its sixth consecutive monthly decline.

Overall, the Central Bank appears optimistic about the prospects for the economy. And if its analysis proves correct, particularly its belief that the downturn in the US economy will be shortlived, there could yet be a few more years of rapid growth.

The full text of the Central Bank's annual report is available at The Irish Times website: www.ireland.com.