Inappropriately low interest rates leave Ireland exposed to a severe correction in the housing market, according to a leading economist. Dominic Coyle reports.

Mr Rossa White, economist with Davy Stockbrokers, says that Irish interest rates should currently be at 6 per cent, three times the current ECB rate of 2 per cent.

The low rate across the euro zone also increases the prospects of a return to higher inflation in Ireland when rates rise, he says.

"There is no doubt that an inappropriate policy rate for Ireland is fuelling the booming residential construction sector," he writes in a research note to clients. "Our worry is that an elongated boom could lead to a more severe correction in the housing market when rates finally begin their ascent."

While Mr White accepts that Ireland has had few fiscal or exchange rate problems since the arrival of the euro zone in 1999, he argues the loss of control over monetary policy at that time has had an impact on the economy. He points to record housebuilding, a 25 per cent annual growth rate in private credit, the near doubling of house prices and a 5.5 per cent average inflation rate in the service sector.

"Putting all this together, we reckon that an appropriate policy rate for Ireland is around 6 per cent, fully four percentage points above its actual level," says Mr White. Even when rates do start to rise later this year, he acknowledges that they are likely to reach only 3 per cent, still half of what Davy sees as the correct level for Ireland.

The current interest rate policy could also leave Ireland open to rising inflation, Mr White warns. In that event, he suggests, Ireland might have to rely further on strengthening of the euro to keep it in check.