The level of consumer prices in the Republic is now more than 12 per cent above the euro zone average, highlighting a sharp deterioration in competitiveness, the Central Bank has warned, writes Cliff Taylor, Economics Editor
It is now of "overriding importance" that the rate of inflation here falls back to the euro zone average to protect growth and jobs, the bank warns in its latest quarterly commentary.
Its forecasters have sharply reduced their growth forecasts and expect the total number of people in employment to fall for the first time in years.
"It is no longer a question of maintaining competitiveness, it is a question of restoring it," warned Dr Michael Casey, the Bank's assistant director general , at a press briefing to launch the report yesterday.
The Irish inflation rate has been consistently above the euro zone average in recent years, he pointed out, and while consumer price inflation is forecast to fall from 4.6 per cent last year to 3.75 per cent this year, this would be the sixth year in succession that it has exceeded the euro zone average.
The latest official European measure showed that these relatively high inflation rates had left the average level of prices in Ireland some 12 per cent above the euro zone average last year, with the gap widening all the time.
To restore competitiveness Irish price inflation would need to be below the euro average for a sustained period, Dr Casey pointed out, and there is no prospect of this happening in the short term, with continuing price pressures in the services sector in particular.
The Bank is also worried about excessive lending in the mortgage market. Its governor, Mr John Hurley, has written to the banks and building societies,warning them to stay within guidelines. It has also sent teams of inspectors into the institutions to make sure they are adhering to lending rules.
Overall the Bank feels that the era of sharp house price increases may be coming to an end and that prices may "plateau", or even fall back slightly, this year. It is warning borrowers to be aware of this and not to overextend themselves when taking out a mortgage.
Against a background of international uncertainty, the Bank has reduced its economic growth forecasts. It expects Gross National Product to rise by 1.75 per cent this year, down from its previous estimate of 3 per cent. The total number of people at work is expected to edge back by 5,000, or 0.25 per cent of the labour force, with the unemployment rate predicted to rise to 5.75 per cent, from an average of 4.5 per cent last year.