The Central Bank's positive economic outlook yesterday was coloured by its broader concern about the risks to competitiveness in the economy. It had one word in mind: inflation.

So while the Bank's new governor, Mr John Hurley, forecast 3 per cent gross national product growth this year in his first annual report, he warned that rising prices posed the most significant risk to the economy.

Already two percentage points above the euro-zone average, the latest annual inflation forecast of 4.25 per cent this year continues to cause concern on Dame Street.

This is especially so because the Central Bank no longer controls the interest rate - hence the focus on factors within the control of the domestic players: wage, service and utility costs, and the call for a prudent fiscal policy.

The annual report was published against a backdrop of the European Central Bank deciding last week to leave interest rates unchanged.

But Mr Hurley said: "The outlook remains less satisfactory than originally expected some months ago. The recent appreciation of the euro will contribute to containing inflationary pressures if it is sustained. It is still too early to assess the impact of these developments on the outlook for prices."

The annual report said the economy could expand by 4.5 to 5 per cent this year. There were two caveats, however. First, the pace of the international US-led recovery and, second, domestic developments.

Mr Hurley can do nothing about the international situation. On the home scene, he would not pre-empt the outcome of the benchmarking report expected this month. But the following statement from the report was stark enough: "Moderation in wage developments in the public sector is also necessary in order to preserve stability in the public finances."

Given that social partnership was a good thing, he was sending a clear signal that the wages free-for-all predicted by certain observers would not be welcome.

Mr Hurley noted that Government spending increased by 17.5 per cent last year while revenues rose by only 7.75 per cent due to lower growth and discretionary fiscal action. Fiscal policy should aim to ensure a neutral stance, he said.

Of course, the latest figures suggest that expenditure is increasing greatly in excess of tax receipts, with income tax levels causing particular concern. Mr Hurley suggested the picture would become clearer when second-quarter figures were available.

What is hugely clear already, however, is that the current signals suggest that all is far from well. Growth of 4.5 to 5 per cent is required to maintain employment in the present climate and create new jobs. Yet nominal wage growth of 9 per cent annually "cannot be sustained without seriously undermining competitiveness and employment prospects".

Such an observation is likely to be repeated to the Government by Mr Hurley's former colleagues in the Department of Finance when the new partnership talks begin in the autumn. To expect the negotiations to continue long into the night seems fair.