Mortgage rates may double, says Central Bank

The Central Bank has again cautioned on the effect rising interest rates could have on borrowers' abilities to pay back their mortgages, saying they could effectively double from current levels over the next few years.

However, despite ongoing concerns about the property market, the bank says economy is in good shape and should grow at its full potential over the next year and a half if some key risks are avoided.

Particular care must be taken to hold down inflation in the services sector and keep debt levels under control, the bank's economists warned.

Launching the Central Bank's second commentary of the year, assistant director general Tom O'Connell said growth had been boosted by a pick-up in exports and housing investment over the first few months of 2005.

The bank's economists have raised their gross national product (GNP) growth forecast for this year from 4.75 per cent to 5.25 per cent. They expect a similar growth performance in 2006.

However, Mr O'Connell warned that the economy will need to avoid a number of risks at home and abroad, but he acknowledged that the biggest potential dangers to the economy - high oil prices and unhelpful exchange rates - are beyond Irish control.

Oil prices are double their average level of two years ago and could cause inflationary pressures if they remain so high, he noted.He added that the inflationary risks to the economy were "not insignificant". The US dollar is susceptible to a "potentially large correction", in the Central Bank's view and the possibility of a rapid increase in the value of the euro is one of the biggest risks facing the Irish economy because of the large proportion of trade conducted outside the euro zone, according to the commentary.

High on the bank's list of potential domestic pressures on the economy is a price spiral in the services sector. Mr O'Connell said it would be a "challenge" to keep services inflation in check at a time when wages are growing by 6 per cent and the economy is essentially at full employment.

He said competitiveness is "rather stretched" and Irish price levels are 16 per cent higher than those in the euro zone as a whole.

Mr O'Connell welcomed indications that house price increases have eased, but he said growth in mortgage borrowing remains a "matter of concern".

Meanwhile, the ECB kept its key interest rate at 2 per cent yesterday and ruled out any rate cut in the near future.