The low level of euro zone interest rates cannot continue indefinitely, the Central Bank said today, reinforcing suggestions the European Central Bank may raise rates in June.
Backing the cautionary outlook from economists at Allied Irish Bank, it noted the cost of a new home had seen a significant increase of 11 per cent in February, compared to 7 per cent last autumn.
The average price of a house nationwide has topped €285,000, but in the capital prices on average have broken through the €380,000 mark. The Central Bank said this re-acceleration of prices was worrying.
In its second Quarterly Bulletin for 2006, the Central Bank said: "This is a worrying development and increases the risk of a sharp correction in the future.
"It is important that lenders and borrowers take into account the current still very low level of interest rates and that this situation cannot continue indefinitely," the bank said, in the context of Ireland's strong house prices and borrowing growth.
The warning came despite two interest rate rises in recent months from the ECB where the Central Bank governor John Hurley is a member of the rate-setting council.
"The Governing Council of the ECB increased interest rates by 0.25 per cent in each of December 2005 and March 2006 and has signalled that it will continue to monitor very closely all developments with respect to risks to price stability over the medium-term," the bank said in its quarterly bulletin.
ECB President Jean-Claude Trichet last week signalled the ECB would not raise rates in May but might well act in June. His comments were reinforced by other ECB members this week.
The Central Bank also said there were signs the euro zone economy was strengthening but there was not yet hard evidence of growth picking up pace. "In the euro area, following a rather weak performance last year when GDP growth amounted to 1.4 per cent, there are signs of a strengthening and a broadening of growth," the bank said.
"However, as yet the evidence for this is based more on 'soft', forward-looking survey indicators than on firm measures of activity."
In its last quarterly bulletin in January, the Central Bank said activity in the euro zone economy seemed to be picking up and there were grounds for optimism but warned there was still little reason to expect an improvement in consumption.