The governor of the Central Bank, John Hurley, has reiterated the bank's prediction of "low single-figure" growth in Irish house prices, saying that while the number of homes being built would fall, it was important to remember that Ireland had an infrastructure deficit.

Last week, AIB predicted that house prices would fall by 2 per cent this year.

Mr Hurley made his comments following his address to a Dublin conference organised by the Global Interdependence Center. He said that the main challenges for Ireland were to maintain the high level of living standards, ensure the economy's competitiveness and, if necessary, adjust to shocks originating outside the euro zone.

He called on the social partners to ensure that pay increases take account of productivity developments. If this was not taken into account, he expressed concern that lower productivity growth would lead to slower growth in output and put further pressure on inflation, which stands at 5 per cent.

The focus of his speech was rising inflation and he said that the European Central Bank, of which he is on the governing council, remains vigilant and prepared to act to alleviate any pressures. The rise in oil prices in recent months had meant that the anticipated dip in inflation in the first half of the year had not occurred. As a result, the governing council was closely monitoring all the pressures to ensure that the risks to price stability over the medium term did not materialise.

He said that the ECB was determined to ensure that inflation expectations stayed around the 2 per cent level, indicating that rates would rise if inflation concerns increased. The bank last week raised interest rates to 4 per cent, the eighth increase since December 2005, and indicated that further rises might be on the way.

Reiterating this sentiment, Mr Hurley yesterday said that the future decisions of the bank were not predetermined and that there was " no pre-commitment" to any future policy action. "As we indicated last week, we will monitor developments closely and act, as necessary, to ensure that risks to price stability over the medium term do not materialise," he said.

However, he also praised the euro-zone economy's strong performance over the past 18 months and said that the medium-term outlook remained favourable.

"The information we have for the first quarter of 2007 suggests that growth remains healthy," he said, adding that the conditions were still in place for the euro area economy to grow solidly. He said that external demand, while moderating, should still provide some support, and the outlook for domestic demand was strong.

"Our assessment is that the risks to the outlook for growth are broadly balanced in the short term," Mr Hurley said. "However, over the longer term there are some downside risks from oil price movements and global imbalances." - (Additional reporting Reuters)