The 16 per cent fall in the value of the pound against sterling over the past year will result in a sharp increase in inflation to an average of 4.4 per cent next year, according to the latest economic review from Davy Stockbrokers.

Indeed, had the pound not declined so rapidly against sterling since last August, inflation would now be running at less than 0.1 per cent.

This is mainly due to the intensification of competition in the retail sector as a result of the arrival of major British multiples and also the more aggressive competition policies being pursued by the authorities which have impacted on prices in areas like the pub trade.

According to Davy economists Mr Jim O'Leary and Mr Michael Crowley, the rise in inflation next year is unlikely to impact on Ireland's chance of being a starter-member of European Monetary Union.

The inflation figure on which EMU membership is accepted will probably be the 1997 figure, and Davy's forecast for a 1.9 per cent inflation rate for this year means that Ireland should comfortably fulfil the inflation qualification for EMU.

"Assuming no more than a modest reversal of this decline throughout the forecast period, we expect CPI inflation to accelerate sharply over the balance of 1997 and through the first half of next year.

We are still forecasting an annual rate of core (excluding mortgages) inflation of 1.9 per cent for 1997, but we expect the average rate for 1998 to be 4.4 per cent."

The Davy economists expect inflation to peak at 5 per cent in mid-1998 but to fall to a 4 per cent by the end of the next year. How domestic inflation evolves in 1999 and onwards will depend on now sterling behaves against the euro. If sterling falls to a level close to the current estimates of its equilibrium value against the euro - equivalent to a rate of 2.50 to 2.60 against the deutschmark - then inflation in Ireland should return to a 2 to 3 per cent range, says the Davy report.

Commenting that "The Celtic Tiger continues to bound ahead," the Davy economists have increased their forecast for 1997 gross domestic product from 6.8 per cent to 7.8 per cent with a 6.5 per cent forecast for 1998. If these forecasts are accurate, it will mean that GDP will have increased by 46 per cent in the five years between 1993 and 1998, pointing to "an unprecedented rise in living standards."

This growth in the economy has been accompanied by an unparalleled increase in employment. In the three years from April 1993 to April 1996, there was a 138,000 increase in the numbers at work.

Davy expects a further 56,000 rise in the numbers at work in the 12 months to last April with a further 90,000 jobs in the two years between April 1997 and 1999.

These forecasts suggest that the unemployment rate will be in single figures by the end of next year.