The global economy will perform well this year despite sharp falls on world stock markets this week. However, interest rates will rise by at least three-quarters of a percentage point, economist Jim Power warned yesterday.

Presenting the latest Friends First Quarterly Economic Outlook, Mr Power said the European Central Bank would continue to increase its main refinancing rate at least until the autumn up to a rate of 4.25 per cent. He said that a further two quarter-point rises could not be ruled out in 2008.

According to Friends First forecasts, the euro-zone economy will grow by 2.3 per cent this year, down from 2.7 per cent in 2006, while the US economy will grow by 2.5 per cent and the Japanese economy by 2.1 per cent. This was a "stable backdrop" for the Irish economy, which had more to fear from the US housing market.

Continuing strength in the euro zone suggests that "rates will go up by another 0.25 per cent in March, another 0.25 per cent by the end of the summer and the odds are now moving towards a further 0.25 per cent later in the year". He added that while the housing market had reached its 'zenith', a collapse in prices was unlikely. He warned that Ireland's competitiveness was declining because the cost of public services were rising significantly faster than general inflation.