Bank cuts growth forecast and warns of major 'risks'

The Central Bank has warned of "significant risks" which could derail Irish economic recovery and has shaved growth expectations for this year to reflect continuing global weakness.

The governor of the Central Bank, Mr John Hurley, said yesterday that high domestic inflation and the rapid rise in the euro had created "stark" threats to the Republic's competitiveness.

He said that the economy would have to become more productive, particularly within sheltered and indigenous sectors, and called for a continued policy focus on competitiveness problems. "This is especially important in the light of the rapid strengthening of the euro in the recent past and the risk that it could further appreciate," he said.

In an address to mark the publication of the Central Bank's annual report, Mr Hurley predicted that economic recovery in the euro zone would be delayed until early 2004.

The governor signalled the readiness of the European Central Bank (ECB) to encourage growth by further reducing interest rates over coming months "should that prove necessary".

He said that while the interest-rate reductions the ECB has already delivered had created conditions "conducive to growth and investment", it would take time to assess their full effect.

The ECB's governing council is adopting a "wait and see" approach, according to the governor.

The Central Bank now expects the Republic's gross national product (GNP) to grow by 1.5 per cent this year, down from a previous forecast of 1.75 per cent. The bank's gross domestic product (GDP) forecast has been reduced from 3.75 per cent to 2.75 per cent. "The revision reflects the postponement of a global recovery," Mr Hurley said, describing the Irish economic performance against such a backdrop as "creditable".

Mr Hurley went on to reiterate the bank's concern about continued high growth in Irish mortgage lending, which is currently growing by 24 per cent on an annual basis.

The bank was "certainly disappointed" that demand for mortgages had not diminished in light of the weakening economy and falling income levels, he said.

The Central Bank is currently examining the lending policies of Irish financial institutions to assess the levels of "stress" new loans are placing on both consumers and lenders. This inquiry will be carried out by the Irish Financial Services Regulatory Authority (IFSRA), the newly-established single financial regulator.

The bank's annual report warns that a relaxation of "loan-to-value" limits on mortgages could damage financial stability if lenders do not take due account of a borrower's ability to repay. Economic slowdown can lead to a temptation for lenders to "cut corners" to meet profitability expectations, the bank warned.

The governor has played down the likelihood of a sharp downward correction in house prices. He said that the property market had slowed as supply moved to meet demand and he predicted that this balance should lead to flat price growth unless an external shock caused a hard economic landing. "The housing market should stabilise," he said.

"On balance, the economy has been performing as well as can be expected in this difficult global environment and after a period of domestic overheating," he concluded.