Analysis:Central Bank should have curtailed availability of mortgages, writes Marc Coleman, Economics Editor

"We are starting from a place where the price level in the economy is the highest in Europe." With these words, Central Bank assistant director general Tom O'Connell may have - inadvertently and unwillingly - intervened in the next election.

In party political terms, central bankers are a model of neutrality. But there are two things they are never neutral about: the overall price level and the inflation rate. The higher the former, the less desirable any acceleration in the latter becomes. From 2.5 per cent in 2005, inflation - as measured by the Consumer Price Index - rose to 4 per cent last year.

In the final three months of that year, it sky rocketed from 3.9 per cent in October, to 4.4 per cent in November and 4.9 per cent in December.

Around seven years ago, Ireland's price level was still competitive. As well as being strong, economic growth was well balanced between domestic demand (housing construction, consumption and investment) and external demand (exports of goods and services).

Then inflation rose beyond the rate of inflation in the euro zone and stayed above it for three years, leading to a cost of living that - according to EU statistics office Eurostat - is the highest in the EU and at least 15 per cent higher than the EU average.

As Mr O'Connell pointed out yesterday, between 2003 and 2005, the higher cost of living stayed, but at least the differential in inflation disappeared only to rear its ugly head again early last year. Forecasts contained in yesterday's bulletin suggest that Irish inflation will remain higher than in the euro zone at least this year as well, and most likely into 2008, pushing our relative cost of living even higher. Ironically, most of the recent inflation surge reflects interest rate rises implemented by the European Central Bank (ECB), a body on which our central bank has a seat and a vote.

So where does the Central Bank get off warning us about inflation? Central banks increase interest rates and this raises mortgage repayment costs. As Mr O'Connell correctly pointed out yesterday, there is another source of Ireland's high house price levels - what he termed the "artificial scarcity of zoned land". But that doesn't let the bank off the hook.

There is another component to high Irish house prices: This is the fact that while zoned land remained scarce - constraining growth in the supply of houses in urban areas - Irish banks greatly expanded the amount of credit available for house purchase, a situation that more than any other type of institution, central banks are supposed to prevent.