Economic growth will slow to 6 per cent this year as a result of the foot-and-mouth disease restrictions, according to the latest estimates from the Central Bank.
In its annual report, published yesterday, the bank cites falling tourism receipts as its reason for trimming the 7 per cent forecast for GNP growth which it published in its most recent monthly bulletin.
However, the governor of the bank, Mr Maurice O'Connell, said that a growth rate of 6 per cent was still slightly higher than was sustainable over the longer term. The Government is urged to take measures to slow the rate of growth still further.
The bank estimates that inflation will average 4.5 per cent this year. This is still a cause for concern, according to Mr O'Connell. However, he reassured borrowers that interest rates would not be on the way up for about two years.
Mr O'Connell noted that the projected inflation rate was a substantial improvement on last year and brought the Republic down to the level of some other euro-zone states. But he warned that this did not absolve us from the need to be "particularly vigilant". On an EU-harmonised basis, Irish inflation will average about 3.75 per cent this year.
The report calls for Government action to limit growth in domestic demand, saying that it would be inadvisable to rely on a weakening of competitiveness to slow growth. "Fiscal policy, in particular, should be seen as an appropriate means of slowing economic growth to a more sustainable rate," it says.
The governor refused to be more specific about what tax rises or spending cuts the Government should consider. He also refused to be drawn on the latest European Commission proposals for reining in the Irish economy. "We live in very uncertain times," he said. "The ground has been moving and we must wait and see."
In a new analysis, the bank highlighted a number of risks facing the economy. These ranged from house prices to credit growth, wages and currency values. It describes this exercise as an "early-warning system" to help to avert any risk of a potential financial crisis among Irish banks.
The bank found that, while there are risks, they "do not pose a significant risk to stability". House prices have continued to rise at a "disturbing rate", while congestion problems have intensified as increasing demands are placed on the State's infrastructure.
The report highlighted ongoing concern about wage rises. "It is a fact of life that wages and prices tend to have a momentum of their own that can give rise to overshooting."
The bank cautioned that wage rises, if combined with a sharp depreciation of the US dollar, would lead to pressure on profit margins and to repercussions for some borrowers.
Credit growth, while still a worry, is falling back. Yesterday, the bank announced that it had fallen to 15.8 per cent in March from 18.2 per cent in February, its weakest level since February 1997. Mortgage lending also fell back slightly to 22.3 per cent from 22.9 per cent a month earlier, its sixth consecutive monthly decline.
The report indicates that the Central Bank made a return of €520 million on its reserves this year, a particularly good performance on the back of significant gains from the weak euro and higher interest rates.