Bank warns of threat from interest rate, oil hikes

Accelerating house prices and rapidly rising levels of indebtedness are heightening the vulnerability of the economy to interest rate increases and escalating oil prices, the Central Bank warned yesterday.

While growth prospects remain positive, the economy is still exposed to external shocks, the bank said in its latest quarterly bulletin.

Demand for Irish exports remains muted and has created an imbalance in economic growth, which is now being driven by domestic demand to a much greater extent than before.

Consumer spending is replacing housing investment as the main reason for growth in domestic demand and is being boosted in part by the maturing of Special Savings Incentive Accounts (SSIAs), the bank said.

Consumer spending has been growing at a reasonably strong pace in the last year, but it has lagged the growth in disposable incomes, leading to an increase in the savings rate.

The Central Bank said this could have reflected a tendency for consumers to put off major purchases until they received funds from their SSIAs, which started to mature in May.

It is forecasting growth in consumer spending of 6.25 per cent in 2006, a rate that should exceed the rate of growth in disposable incomes. In a reversal of recent trends, a reduction in the rate of savings "seems likely".

As two-thirds of SSIAs do not mature until 2007, growth in consumption looks set to increase to 6.5 per cent next year.

A major part of the €1.6 billion estimated to be released from SSIAs is expected to be spent on "consumer durables" such as cars and holidays, but the spending spree may have a limited impact on domestic output as demand will be met in many cases by increased imports, the bank said.

There are signs that housing investment may not expand as rapidly as in the past, the bulletin said. However, overall construction is still expected to grow.

The prospect of growth in exports could be jeopardised by a significant depreciation in the dollar against the euro and continuing volatility in oil prices, the bank commented.

Meanwhile, jobs growth is expected to remain strong this year and next year, although some easing back seems likely.

The growth rate of both gross national product and gross domestic product is predicted to be about 5 per cent this year.