The Central Bank's economic views inevitably have consequences in the political arena, writes Marc Coleman, Economics Editor

The tone during yesterday's presentation of the latest Central Bank Quarterly Bulletin was softer than usual. With an election coming up, the last thing any central banker wants to be seen doing is intervening, wittingly or unwittingly, in politics.

Be that as it may, two events this week are likely to drag the bulletin's finding into the public spotlight: its warnings about declining competitiveness in the economy make the continuing strength of the euro against the US dollar yesterday one of them. Its prediction that growth will fall next year to 4 per cent makes economic assumptions, made by various political parties in costing this week's spate of economic manifestos, yet another.

Dollar weakness pushed the euro to a level of $1.36 yesterday, just half a cent lower than its all-time high. Even without this, yesterday's Central Bank figures show that Irish exporters were already facing a squeeze. As Central Bank assistant director Tom O'Connell said, the cost of living here is already very high compared to the rest of Europe. Even using the most conservative possible measure of inflation - the Harmonised Index of Consumer Prices (HICP) - Irish inflation is now 1 per cent higher than in the euro zone.

With a growing clamour for higher pay increases and with consumer demand likely to remain strong for at least a year, pressure on this "core" measure of inflation - which excludes interest rate effects - will remain strong. On top of that add the fact that the euro - the currency in which most indigenous exporters denominate their wares - has risen 13 per cent since the year began and it becomes easy to see how the economy's export competitiveness is coming under increasing pressure.

The position is even more serious than recent inflation figures would suggest, as O'Connell also makes clear. "It has to be recognised that we are starting from a position where our cost of living is high, very high, by euro area standards."

At a separate venue in Dublin yesterday, Andrew Healy of National Irish Bank made a similar point. "The single greatest threat to Irish prosperity comes from the rising cost of doing business here."

The crumb of comfort - and it is just a crumb - is that the Central Bank does forecast inflation to converge with euro zone inflation by next year.

Provided an outbreak of copycat pay rises in the public sector is avoided, that hope may be realised.

But as most analysts agree, the dollar isn't going anywhere but down, with a rate of $1.40 being spoken of as the likely end-year rate against the euro.

At minus 4 per cent of Gross Domestic Product (GDP) the balance of payments deficit is already worryingly large. Exports net of imports fell in annual terms by 10 per cent in the last quarter of 2006 and even the Government predicts a further, albeit more modest fall this year.

As both O'Connell and Healy said yesterday, even if we can do nothing about the value of the dollar, there are things we can do to improve the contribution the domestic economy makes to competitiveness.

As well as queuing up to say how they intend cutting taxes, political parties might this week also care to explain how they intend cutting prices.