The Central Bank has managed to inject a significant note of caution into a review of an economy over which most other central bankers would be glad to preside. Finding a cloud in the economy's silver lining, it has warned again of the danger that a higher rate of inflation could take hold in the economy. Dr Michael Casey, assistant director general at the Bank, started yesterday's presentation of its quarterly report by pointing to the long list of positives about the economy: living standards have improved significantly; Ireland's GDP per capita is now around the EU average compared to an estimated 88 per cent in 1994; employment growth has been very strong; and the unemployment rate has fallen to 9 per cent from 14.1 per cent in 1994.
The strong growth has also led to a big improvement in the Government's finances and a likely fall in the Government debt to GDP ratio to about 55 per cent at the end of this year, significantly below the Maastricht criteria level of 60 per cent. The Government's finances are expected to be in around £700 million in surplus at the end of this year. But the Bank has difficulty with this so-called pot of money, insisting it should be spent on paying off the debt, or "rainy day" money, as Dr Casey would have it. Using traditional economic arguments, it believes that because the economy is booming and interest rates are set to fall, the Government should not inject any more money into the economy in the Budget. Any income tax reductions should thus be offset by tax increases elsewhere, it argues, in an argument unlikely to find favour with the Government.
The threat of inflation is "a blot on an otherwise pristine landscape," according to Dr Casey. The biggest danger, the bank fears, is a return of "inflationary expectations" - the rate of inflation expected by the public, which determines wage demands. This in turn could hit competitiveness and jobs.
The Bank is sticking with its 2.75 per cent forecast for the average inflation rate this year and a similar level for next year. This year's is in line with most other economists, but its 1999 prediction is higher.
To justify this, Dr Casey points to what he calls inflation in the non-traded part of the economy, principally the public sector, which is running at around 3.5 per cent. And as a result, the bank is holding out against reducing interest rates for as long as possible.
The Bank warns that the economy cannot keep on expanding at the current level. It has estimated that the long run sustainable growth level is about 5 per cent, which should be the norm in a few years time.
But in the meantime strong growth is still the order of the day. This year the economy will grow by 7.75 per cent in terms of GNP, in line with last year, it believes.
