Government revises inflation figure to 5.25%

The latest inflation target of 5.25 per cent for the year - forecast only yesterday by the Government - may have to be revised within weeks, leading to even greater pressure for the national wage agreement to be renegotiated. The new inflation figure, published by the Department of Finance, is based on the assumption that interest rates will not rise between now and the end of the year and that the euro will remain stable.

Economists predicted yesterday that interest rates are certain to rise between now and December, probably by 0.5 of a percentage point, increasing mortgage costs and inflation.

The first rise could come as early as next week when the council of the European Central Bank meets after its summer break. The euro continued to fluctuate on the foreign exchange markets yesterday and is close to its all-time low against the dollar.

"The [Government's] assumptions do seem a little disingenuous," said Mr Dermot O'Brien, economist with NCB Stockbrokers in Dublin. "The consensus is that the ECB will start to raise rates next week, which could add up to 0.3 per cent to inflation," said Mr Dan McLaughlin, chief economist with ABN Amro bank. Mr Joe O'Toole, the vice-president of the Irish Congress of Trade Unions said yesterday that congress would be seeking some form of compensation for workers if inflation ran at more than 5 per cent instead of the 3 per cent that the current agreement - the Programme for Prosperity and Fairness - was based on.

It could take the form of a once-off payment, pay rises or tax cuts, he said. Mr Des Geraghty, the general secretary of SIPTU, the Republic's biggest union, said there was "now an unanswerable case to be made for a review" of the agreement.

The Minister for Finance, Mr McCreevy, who is on holiday, issued a statement with the figures saying "the Government is very concerned about the impact inflation could have on out economic performance and have already announced a range of measures to address the inflationary pressures". Mr Derek McDowell, the Labour finance spokesman, said that the new inflation target was "an admission of failure by the Minister for Finance to manage the economy".

He said that the figure was conservative but still almost double the target of 3 per cent set in last year's Budget. Concerns over inflation clouded an otherwise upbeat mid-term message from the Department of Finance, which has substantially increased its growth forecast for this year.

The Republic's Gross Domestic Product - the value in monetary terms of all the goods and services produced by the economy - is now expected to increase by 10.3 per cent compared to the previous estimate of 7.4 per cent. Gross National Product - which is GDP less earnings repatriated by foreign owned business - will grow by 8.3 per cent. It had previously been expected to increase by 7.2 per cent.

Unemployment at the end of the year is now expected to be 4.5 per cent, compared to earlier forecast of 4.8 per cent.

The number of people at work will grow this year by 75,000, bringing the Republic to the verge of full employment. The economy is growing faster than expected, due mainly to a higher than predicted level of demand for goods and services among Irish consumers.

Personal consumption is expected to grow by 8.5 per cent this year "assisted by rising employment and earnings, reductions in personal taxation and relatively low interest rates in historic terms," according to the Department of Finance's Economic Review and Outlook.

Exports are also growing faster than expected and will grow by 15.6 per cent, which is 4.2 per cent more than predicted. The economy is capable of further growth - albeit at a lower rate - despite a growing shortage of workers and constraints in other areas such as transport and housing, according to the review. The Programme for Prosperity and Fairness is the cornerstone of economic policy, but in meeting its commitments under the agreement the Government must not anything that would further boost demand and fuel inflation, the Department warned. "In this way the risks to the stability of the economy, including the heightened inflationary pressure, can be minimised and the good economic performance of recent years can be maintained at a sustainable level," according to the Department.