ANALYSIS: Central bankers are paid to worry. "Maybe we are too curmudgeonly," said Dr Michael Casey, the Bank's assistant director general, when questioned about the outlook for inflation.

The rate of inflation is, after all, falling quite rapidly and had it not been for the additional indirect tax increases on Budget day, the consumer price index might have risen by less than 3 per cent this year.

The Bank welcomes this improvement in the "underlying" inflation performance, but warns that it may not be enough.

The trouble is that the rate of inflation has been well above the EU average over the past five years. This year the Bank forecasts it will be 3.75 per cent, as measured by the consumer price index - or a slightly higher 4 per cent on the measure used to compare inflation across the EU. This compares with an expected euro- zone average of 1.8 per cent.

Unless inflation falls back quickly to the euro-zone average - or preferably below it - the bank fears that the cost will be paid in job losses and slower growth. An analysis by its researchers shows that while the high-tech sector, particularly chemicals, has been increasing output sharply in recent years, the output of traditional sectors fell in 2001 and 2002 and it is likely to drop again this year.

Dr Casey warned there was a risk that this trend could be reflected in job losses. It was not entirely clear whether traditional industry - sectors such as food and clothing - could maintain job levels for much longer, he warned.

Pressure on many of these firms will be intensified by the recent rise in value of the euro, which had seen the trade- weighted competitiveness index rise by around 8 per cent since January 1999. With price levels here now stuck well above the euro-zone average, Dr Casey said the issue was not maintaining competitiveness, but restoring it.

The Bank produced a range of other figures to back up its case of an immediate competitiveness threat. In particular, new data attempting to measure unit wage costs in the whole economy show increases here of 5.8 per cent last year and 3.8 per cent this year, compared to euro-zone averages of 2.5 per cent and 1.3 per cent respectively.

According to Dr Casey, "we are continuing to lose competitiveness, so the road back will be all the more difficult".

In terms of measuring the performance of the economy, the Central Bank is firmly in the camp which prefers to concentrate on GNP, the measure of national output which nets out profit repatriations and other financial flows. On this basis it expects a recovery from growth of 1.25 per cent last year to 1.75 per cent this year.

However, it warns, in common with other forecasters, that the uncertainties caused by both the war and the hangover from the economic boom mean that these are more projections than firm forecasts.

The Bank expects consumer spending to rise by 2 per cent this year but believes that investment spending by business will drop by 1 per cent. Exports are forecast to rise by 5 per cent, on the basis of some international recovery later in the year,

A key factor would be confidence, said Dr Casey, and consumers needed to realise that the economy inevitably moved in cycles and that the upturn would come.

In the weeks ahead, it remains to be seen whether this key factor of confidence can be maintained, with much depending on the performance of a fragile world economy. If it does not recover, then the Bank is clear in warning that unemployment could be higher and growth lower than its latest projections.