The Central Bank has said the sharp decline in the value of the dollar had exposed Ireland's declining competitiveness.
In its quarterly bulletin for winter 2003, the bank said that since joining the EMU in 1999 the State's economic competitiveness had declined by 14 per cent and as a result price levels in Ireland are now 12 per cent above the EU average.
According to the bank, cost inflation here was offset by the weak exchange rate of the euro but "this cushion has been removed". Because such a high proportion of Ireland's trade is with countries outside the euro area the dollar and sterling exchange rates "are of particular importance".
An easing of the inflation rate in the second half of the year was welcomed by the bank. However, Ireland's inflation rate of 2.9 per cent remains the second highest in the euro zone.
The bank also reiterated its concern at the rate of house price growth in the context of subdued economic growth, lower employment increases and declining inflation.
The Consumer Price Index is expected to increase by about 2.75 per cent in 2004 to 3.5 per cent. The bank called on the Government to work towards the 2 per cent inflation rate set by the European Central Bank.
Taking a broader view the bank said there were signs of recovery in the Irish economy and that GNP growth was expected to be 3.5 per cent in 2004.
The rate of employment was also a cause for optimism with the Ireland having only 4.75 per cent of people out of work, which is almost half the EU average.