The inflation rate averaged 2.4 per cent last year, the second-highest level in the euro area. Even though the annual rate fell back to 1.7 per cent in December, it is still significantly above the levels recorded in the larger European economies of France and Germany.

The main reason for the fall to 1.7 per cent in December from 2.1 per cent in November was mortgage rate cuts which fed into the figures. According to the European harmonised index - which excludes the mortgage effect - inflation was running at 2.2 per cent in December. This compares with just 0.4 per cent in Germany and 0.3 per cent in France, figures seen as boosting the chances of an early cut in interest rates by the European Central Bank (ECB).

The Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, said the figures proved there could be tax cuts without price rises and demonstrated the wisdom of Government budgetary policy.

However, Mr Michael Noonan, the Fine Gael finance spokesman, said the Government must address house price inflation in particular as it was fuelling wage demands which could undermine competitiveness.

According to Mr Austin Hughes, economist at Irish Intercontinental Bank, the figures may persuade the ECB that the trend in prices across the entire euro bloc is downwards.

"They provide some comfort that any rate cuts should not produce a significant deterioration in inflation from peripheral countries such as Ireland."

He added that an interest rate cut can now be expected in February or March, although developments in Brazil may bring this forward somewhat.

Dr Dan McLaughlin, chief economist at ABN-Amro, pointed out that, excluding the impact of mortgage cuts, the index would have risen by 0.26 per cent, leaving the annual rate unchanged at 2.5 per cent from November.

Analysts are expecting Irish inflation to continue running more quickly than other countries, although the rate may slow down somewhat as a result of participation in the euro.

It now seems clear that Irish inflation is most influenced by world price trends and the exchange rate. Both are likely to lead to a fall in the Irish inflation rate this year. Lower telephone bills and further reductions in mortgage rates will also lead to further reductions in the rate.

In November, the main movers were tobacco, which increased following Budget Day price rises and falling energy prices, particularly home heating oil.