Prospects for the economy remain good, with the Central Bank today forecasting growth for the year of 4.5 per cent.
Although the outlook is generally favourable, the bank warned of a number of risks including the continued focus on house prices, rapid credit growth and an unsustainably large construction sector.
The bank said house price growth of 8 per cent a year was worrying against a background of very high prices and fairly subdued construction costs.
Ultimately, it warned, the market could be heading for a crash. In its first quarterly bulletin of the year, the bank said high levels of housing construction could explain the continued growth of personal sector credit.
Experts warned that mortgage credit - which accounts for about 80 per cent of personal credit - was increasing at an unsustainable rate of more than 25 per cent and growing at more than three times the rate of incomes.
The bulletin expressed concerns that the Irish economy was also vulnerable to fluctuation in exchange rates.
Experts forecast that the growth rate would match potential and be close to the levels seen over the past couple of years. But the bank said there was room for increased competition in the services area and more innovation and research and development activity to promote better productivity performance.
It noted consumer price inflation remained quite low last year and was broadly in line with the euro area average. The harmonised measure of inflation used by the European Central Bank, the HICP, is expected to be unchanged for 2006 at 2.25 per cent, while a modest increase to around 2.75 per cent is expected in the CPI measure.
The bank warned that with the economy operating in a low inflation environment, it is very important to ensure that domestic inflationary or cost pressures do not re-emerge to prejudice competitiveness.