The Governor of the Central Bank Mr John Hurley said today that weak economic growth and price pressures could pave the way for lower interest rates in the euro zone.
The euro zone economy was expected to grow at a slower rate in 2003 than had been expected as recently as last December, Hurley said in the text of a speech to ACI Ireland - the Financial Markets Association.
"To the extent that activity remains weak, inflation could fall by more than we projected.
"In such circumstances, there would be some room for manoeuvre on interest rates," he said.
Last week the European Central Bank left rates unchanged at 2.75 per cent but said it stood ready to lower borrowing costs given doubts over the economy with war looming against Iraq.
Mr Hurley testified to the risks posed to the economy from possible conflict in the Middle East, saying: "We are currently living in uncertain times".
The euro's recent strengthening on the foreign exchanges would serve to dampen inflationary pressures and boost purchasing power, he continued.
"However, the scale of the appreciation, if it were to continue, would undoubtedly slow activity somewhat.
"In the past, the relatively weak exchange rate of the euro has placed exporters to markets outside the euro area in a relatively favourable competitive position," said Mr Hurley. "This is no longer the case."
Given Ireland's stronger trading links with Britain and the United States, the euro's rise was likely to have a greater impact at home than elsewhere in the 12-nation bloc.
He also called for structural reform in the euro zone to be speeded up, since the United States could no longer be expected to be the main engine of world growth in the future as it has been in the past.
"This should be possible with such a large, relatively closed, economy, but it will entail a significant degree of structural reform."
With inflation in Ireland running at 5 per cent - twice the euro zone average - price pressures were starting to threaten its competitiveness and labour market.
"I would reiterate, as we have stated for some time now, that this puts the onus back on prudent fiscal policy and appropriate wage and other cost developments to ensure stability," Mr Hurley said.