The International Monetary Fund has warned Irish policymakers of the risk of overheating in the Irish economy.

In its World Economic Outlook, the IMF highlighted a potential surge in inflation in Ireland, Denmark, Finland, the Netherlands and Norway. Forecasting continuing expansion in these economies up to 1999, it highlights the dangers of rising inflation.

The IMF predicts that the Irish economy will grow by 8.2 per cent this year, followed by 6.8 per cent expansion in 1999. But despite its warnings on the potential for overheating, the IMF forecasts for Irish inflation levels are well below those issued by private sector and Central Bank estimates for 1998.

The IMF suggests that consumer prices will rise by 2.2 per cent in 1998 - less than half the rate of inflation being suggested by some Irish economists. In 1999 the IMF points to an inflation rate of 2.5 per cent.

The report also signals further drops in the rate of unemployment, falling to 9.3 per cent by the end of 1998 and 8.7 per cent in 1999.

The IMF's warning comes a week after the Organisation for Economic Co-Operation and Development (OECD) warned that the Irish economy was beginning to show the classic signs of overheating. The Minister for Finance, Mr Creevy, responded by saying he would honour the Government's commitment not to overspend this year and promising that any stronger-than-expected revenue would be used to increase the budget surplus.

Additional reporting, Reuters