THE Central Bank has scaled hack its inflation forecast by a half percentage point for this year from 2.3 per cent to 1.8 per cent, in a move which makes further interest rate rises far less likely.

In a very optimistic forecast for the economy, it has also raised its growth forecast from 5.5 per cent to 5.75 per cent. Unemployment will also continue to decline, according to the Bank.

Mr Jim Power, chief economist at Bank of Ireland, said the report raises questions about the need for last month's interest rate rise.

"If the Bank is that sanguine about inflation, why did it raise rates?" Mr Power asked. "It now looks certain it was playing hard ball with the Department of Finance."

It also emerged that the Bank spent £1.2 billion in April propping up the pound. The intervention was "absolutely staggering", according to Mr Power. "It proves why the Bank had to pull out of the market when it did, they obviously had to stop. Most of that intervention would have occurred in the 10 days leading up to its withdrawal."

According to Mr Power, intervention at that level is reminiscent of the currency crisis. "Typically, intervention would be at most £100 million in a month," he noted.

The Bank has warned that inflation is expected to be an "upward trend" over the remainder of 1997 and into 1998. However, Mr Power noted that the Bank has completely turned down the tone of its warnings on inflation from last year.

He added that, based on the Central Bank forecast, it is "very difficult to see further rate rises".

One danger that the Bank pointed to is any emerging pressure on public sector pay which could cut the chances of an undershoot in the exchequer borrowing requirement. Nevertheless, it expects the current account to remain in surplus.

Employment will also continue to grow strongly this year, particularly in the service and industrial sector, according to the Central Bank. Total employment is expected to grow by 38,000 or 3 per cent in 1997.

At the same time, unemployment on a Labour Force Survey basis is expected to decline to 11.5 per cent in 1997. On the standardised measure, it is expected to decline to 10.5 per cent.

"The continuation of moderate wage increases in both the public and private sectors is the best assurance of strong employment growth in the years ahead," according to the Bank.

The Bank also noted that a "significant part of recent growth" has been accounted for by an increasing proportion of the population entering the active labour force.

However, the report adds, the emergence of some apparent labour shortages in a number of sectors of the economy suggests that it may become more difficult to sustain recent growth rates.

Moving on to long-term unemployment, the Bank notes that the Irish rate is high by European standards, accounting for more than three-fifths of total unemployment.

This means that the unemployment rate, exclusive of long-term unemployment, is running at about 5 per cent, below the EU average of 5.5 per cent.

The Bank also calls for the Government to use the opportunity of growing tax takes to reduce borrowing, rather than tax cutting. Ensuring the continuation of economic growth close to 5 per cent calls for reasonably tight fiscal policy at a time of strong private sector demand, it states.