The Central Bank trimmed its 2005 growth forecast today, warning of risks from high oil prices and exchange rate swings, but said the prospects for the domestic economy were generally good.
In its quarterly bulletin, the bank cut its estimate for 2005 gross domestic product (GDP) growth to 4.25 per cent from 5.5 per cent previously, and put gross national product (GNP) growth at 4.5 per cent, down from 5.25 per cent.
Growth was expected to continue at a broadly similar pace in 2006, the bank said. In August the country's finance ministry held its own 2005 GDP forecast at 5.1 per cent and revised its GNP prediction up to 5 per cent from a December estimate of 4.7 per cent.
Despite the downward revision the Irish economy, which has been expanding strongly for more than a decade, is expected to far outstrip the sluggish euro zone where growth this year is estimated at just 1.3 per cent.
"(The) broad picture for the Irish economy is generally good despite a high degree of uncertainty surrounding risks from the international economy," the central bank said.
High and volatile oil prices were a concern, it said, as was the potential impact from growing global imbalances on exchange rate movements, such as a sharp depreciation of the US dollar against the euro.
"These could lead to substantial competitiveness pressures against a background in which Ireland has already experienced a deterioration in this regard in recent times," it said.
Domestic inflation remained "reasonably subdued", the Bank said, forecasting an average rate for the year of 2.5 per cent, rising to 2.75 per cent in 2006. It was important, however, to ensure cost pressures - specifically from higher fuel prices - did not re-emerge to threaten competitiveness, it added.
High inflation, peaking at 7 per cent in 2000, threatened to overheat the Irish economy during the heights of its boom. The bank advised caution regarding public finances, including fiscal policy, in order to avoid a significant deficit as a result of possible adverse shocks to the economy.
The Government is expected to unveil its next budget in December.