THE Central Bank has warned that Irish rates may not follow any future German rates.

At the launch of the Central Bank's spring bulletin, Mr Michael Casey, the assistant director, warned that the Irish and German economies were at different stages of the cycle.

"If the Bundesbank were to cut, we would not necessarily follow suit," he said.

However, he did not rule out a partial rate cut, but added that the option of cutting the short term facility (STE) as a gesture while keeping market rates steady could be a possibility.

Mr Peter Charlton, head of monetary policy at the bank, said he believed a further cut in retail rates was a matter of "playing the waiting game".

"If the one month rate falls below, or to, 5 per cent, then the banks will move," he said.

Overall the bank is pleased with the performance of the Irish economy although the slowdown across Europe is impinging on the performance slightly. Overall Gross National Product growth is on target to reach 5.25 per cent and should be associated with increases in employment of 3.25 per cent, which the bank, stressed is "still very high by European standards".

Mr Casey added that growth, was sustainable and "broad based and would spread to all areas of the economy". It was "good quality" and based on a recovery in domestic demand left its growth in investment, he said.

High unemployment was explained by the high numbers of low skilled workers who had been without employment for a long time, said Mr Casey. And although the unemployment rate of 11.75 per cent on a labour force survey basis, was "still very high", it was getting into the "European ballpark", he said.

The bank is still anxious to underline that its main aim is to keep inflationary pressures under control. Eight EU countries have lower inflation than Ireland and the bank is concerned that it could miss the Maastricht criteria of being within 1.5 per cent of the average of the lowest three countries.

"Anything higher than 2.5 per cent could cause a problem," Mr Charlton said.

"We cannot afford to pat ourselves too heartily on the back," added Mr Casey. "There are long lags for inflation and we don't want to sow any inflationary seeds which might sprout in 1997."

The bulletin made a slight change to its forecast for underlying inflation. It is now forecasting underlying inflation of 2.5 per cent and a headline rate of

2.25 per cent.

The bank also questioned current policy on exchequer borrowing. "At a time of strong growth, a more ambitious target could be appropriate," said Mr Casey, referring to the increase to 2.6 per cent from 2 per cent of Gross Domestic Product. "We could be preparing for a rainy day."