Interest rate cuts will be delayed for as long as possible this year, the Central Bank warned yesterday.

In a report commissioned by the Minister for Finance to examine progress towards monetary union, the Bank also warned there is an "obvious danger of overheating" in the economy and called for tax cuts and spending plans to be held off.

The Bank warned that falling interest rates could add to credit growth and to the rise in house or asset prices. In strong language for the Bank, it warned that given the "obvious danger of overheating" the Bank would have a "strong preference" for delaying reductions in interest rates for as long as possible this year.

It will, according to the Bank, be essential to limit domestic inflationary pressure by tighter fiscal or budgetary policy. "The case for a restrictive fiscal policy in the current phase of strong economic growth is very strong."

At the same time, it called on the Government to run a larger surplus to ensure there are fewer pressures on public finances in the event of an economic slowdown in the future.

This call echoes those from the European Monetary Institute and the European Commission to hold tax cuts and spending in check this year and in the 1999 Budget. However, the Central Bank also warned that the commitments given by Mr McCreevy at the time of the revaluation could be endangered by wage demands and litigation claims.

Laying down a clear marker on wage demands, the Bank insisted that wage rises will "have to be consistent with the low inflation environment in monetary union and with the development of productivity". It also called for labour market flexibility, in other words a commitment from workers to accept wage cuts in hard times.

The Bank also warned that it would be "unwise" to expect that the needs of particular regions in euro land can always be addressed. It added that there will be times when monetary policy in the single currency area will not be working in the best interest of some countries in the short term.

The Bank admitted that the benefits for Ireland in joining monetary union would be enhanced if the UK were to participate.

The Minister for Finance, Mr McCreevy, said he has "taken note of" the Bank's comments and in particular the need to have scope to respond to challenging developments.

He added he is pleased that the Central Bank has found that Ireland meets the four convergence criteria for the single currency. "This provides further confirmation that Ireland is well placed to participate in the single currency."