The Central Bank is advising the Minister for Finance to implement a neutral budget to consolidate the recent improvements in the public finances and keep inflation under control.
The bank's autumn bulletin published today is generally upbeat about the economy's prospects forecasting GNP growth of 4.5 per cent for the whole of 2004 and 5 per cent next year signalling an economy growing at full tilt.
With little spare capacity, inflation becomes a threat and so the bank is recommending that the forthcoming budget "should neither add to, nor take from" overall demand in the economy.
The bank adds that Ireland's inflation rate which has been reduced to close to that of the euro zone must be secured at its current level of 2.25 per cent. Next year inflation is expected to rise as growth picks up and in this context wage restraint, especially the ratification of Sustaining Progress part two, will play a key role in maintaining competitiveness.
Commenting on the global economy and its likely effects on Ireland, the bank said global momentum appeared to be slowing faster than expected with rising oil prices being a major concern.
While the bank adds that Western economies are far less vulnerable to oil crises that they were in the 1970s the impact of higher oil prices "remains significant".