Central Bank points to risk of `sharp' slowdown

The economy is at risk of a sharp slowdown if multinational investment is affected by difficulties in the US economy or in key sectors in which the major overseas firms here operate, the Central Bank warned in its annual report.

It also warned that the "inevitable slowdown" in the economy could be exacerbated if costs or inflation took off. According to, Mr Maurice O'Connell, the governor of the Central Bank, it is possible for the economy to slow gradually from the record growth rates of recent years to a more sustainable gross national product growth rate of 45 per cent over the medium term.

But it is also possible that the inevitable slowdown may not be so benign. Speaking at the presentation of its annual report yesterday, Mr O'Connell, said he was "not aware of any specific day of reckoning" but growth would slow down.

A principal risk is the economy's dependence on US firms investing here and a slowdown in the US economy could diminish investment flows. On top of that the US investment is concentrated in a few very high growth sectors and thus any slowdown in these areas would have a disproportionate effect, the report states.

Mr O'Connell again pointed to the rapid increase in house prices as another risk for the economy. The report warns that if economic slowdown is more severe than predicted, then the rate of return on some property investments may prove to be inadequate.

This is particularly the case for some commercial investments, according to the governor.

He added that the Bank was still waiting for all the lenders to reply to his warning letter of last month - published recently in The Irish Times - which asked for detailed explanation of their lending practices.

According to Mr O'Connell the Bank normally uses moral persuasion to encourage lenders not to lend too much. He refused to outline what measures could be taken if the Bank came to the view that the overlending may actually damage the financial standing of the institution.

"It depends on the individual circumstances of the institution," the director general, Mr Padraig McGowan, said.

The report also warns of more generalised inflation in the economy. It points to wage increases in construction and the public sector as well as services inflation. "It is important that these incipient dangers are addressed so as to permit the economy to revert, without undue competitive loss, to more sustainable long-term growth."

Mr O'Connell also re-emphasised that interest rates were unlikely to fall any further. "Interest rates will remain unchanged for some time ahead and the expectation is that rates will not go any lower," he said.

He also insisted that the Euro's recent weakening was exaggerated. "It was simply a reflection of economic conditions in the US and Europe."

Mr O'Connell refused to comment on the report on the new single regulatory authority which is with the Tanaiste and Minister for Finance. But he said that ever since the recent crisis in the Far East and elsewhere there had been a new interest in banking supervision globally.

"We need to have international links and standards and sooner or later the ECB will have a role in the supervision of financial institutions," he said.

The Bank made £177 million in profit last year, up from £115 million a year earlier. This was mostly the result of higher interest rates here than elsewhere in the Euro area. Profits are likely to fall back again this year, Mr McGowan said.

The Bank will also begin minting Euro coins in July, while the first bank notes will roll off the presses early next year.