The Governor of the Central Bank Mr John Hurley today warned a further rise in the euro would damage competitiveness.
Mr Hurley said halting a recent erosion in the country's capacity to compete with its trading partners was vital. "We have seen an increase in the strength of the euro in recent years from a low level which didn't reflect fundamentals," he said in an interview.
"But nevertheless that strengthening unmasked a deterioration in our competitiveness and, clearly, a significant strengthening in the value of the euro relative to the present position would make our competitive position far more difficult," he said.
The central bank chief, who is also a member of the Governing Council of the European Central Bank, said the weakening of Ireland's competitiveness had been reflected in a domestic inflation rate running at twice the euro zone average for several years.
However, the bank is forecasting that inflation will drop to around 2.5 per cent on a harmonised intra-European Union basis next year from around 3.8 per cent at present.
Mr Hurley said the bank's Irish growth forecasts for next year - of around 3.25 per cent in gross domestic product (GDP) terms, and 2.75 per cent in gross national product (GNP) terms - still represented significant levels in comparison to euro zone peers.
The predictions were based on the expectation that a gradual recovery in the global economy would be sustained, he said. "I think I'm more confident than I was some months ago that the recovery, which is a gradual and moderate recovery, is under way, (but) the pace of the recovery and the strength of the recovery very much remains to be determined," he said.
He put trend growth for Ireland at between four and five per cent but said he did not expect the economy to return to that level on average before 2005.
It was important, Hurley said, that negotiations between the Government, unions, and employers on a national wage deal next year took place against a lower inflation backdrop.
He added that the euro's recent gains pose little threat to prospects for a gradual recovery in the euro zone economy next year accompanied by tame price pressures. "At the moment the euro is simply back close to its entrylevel and we don't see that as having any effect on (growth)forecasts going forward," he said.