The Irish economy is increasingly threatened by the strong rate of growth in personal borrowing linked to the housing market, according to the Central Bank.

Speaking at the launch of its 2004 annual report, Central Bank governor John Hurley drew particular attention to the level of personal debt in the Republic compared to other economies.

"There is no longer any doubt that the private sector is highly indebted by international standards and this level will very soon match the levels recorded in Europe's most indebted economies.

"The ratio of debt to disposable income of the household sector is now in excess of 120 per cent and is growing very strongly."

This latest warning comes one day after a joint study by the Irish Intercontinental Bank and the Economic and Social Research Institute, highlighting growing indebtedness of the private sector.

Mr Hurley linked increased borrowing to recent strong growth in investment and house price growth and said that these had up to now been justified by the needs of a growing economy and population.

House prices and housing construction should slow to more sustainable rates, moderating credit growth in the process, according to Mr Hurley, but this had yet to materialise.

"We will remain concerned until we see some evidence of such a slowdown", he said.

Monthly lending statistics of the Central Bank show that private sector credit continues to grow at annual rates of over 20 per cent.

He also hinted at the likely impact of a slowdown in housing construction, as well as to the vulnerability of the economy to increases in interest rates.

"The share of the construction sector in employment is 12 per cent. This compares with 8 per cent for the EU as a whole. Our main concern is that increasing indebtedness is occurring at a time of historically low interest rates."

In response to questioning, the governor cited the openness of the economy as making it especially vulnerable to international risks, including the possibility of increases in oil prices, adverse exchange rate movements and the risk of a "disorderly unwinding of global imbalances".

The latter is a reference to the existence of large deficits on both the US current account and budgetary balance, seen by economists as posing a long-term risk to the global economy.

Mr Hurley - who is a member of the council of the European Central Bank - refused to comment when asked about the prospects for a forthcoming change in interest rates, except to say that present rates were "appropriate".

In spite of highlighting risks to the economy, the Central Bank forecasts that growth in gross domestic product (the value of goods and services produced by the economy) will continue at rates of 5 per cent per annum in coming years.

Turning to the role of government economic policy, Mr Hurley referred to the need to ensure that fiscal policy was able to "cope in the event of downside risks to the economy".

He also said that competitiveness would be sustained by ensuring that pay increases took account of the present low rate of inflation and expressed support for continued structural reform in the economy.