The governor of the Central Bank said today the impact of the war in Iraq on the global economy will depend on its extent and duration.
Mr John Hurley said a prolonged conflict could bring a marked increase in oil prices and undermine consumer and business confidence, slowing consumption and investment spending and weakening economic growth.
"Alternatively, a short and decisive conflict would eliminate the uncertainty that now exists," Mr Hurley said in the text of a speech to be delivered to the Finance Dublin Conference.
Mr Hurley, who sits on the Governing Council of the European Central Bank, said it was not possible at present to assess conclusively the implications for the euro zone.
"But the Governing Council has made it clear that developments will be monitored closely, that it stands ready to act if necessary and will provide liquidity should that be required," he added.
"I would remain concerned that, even in the event of an unwinding of geopolitical tensions, euro area growth is set to remain modest for some time yet," Mr Hurley said.
Yesterday, the ECB's chief economist, Mr Otmar Issing, warned against expecting a rate cut simply because of the clouded economic outlook arising from the war. Euro zone interest rates stand at 2.5 per cent.
But fears that the war in Iraq could go on longer than anticipated have knocked stocks, boosted oil prices and hit the dollar for the second day in a row.