The Central Bank has reiterated its concerns about rising house prices and said Irish consumers would have to accept "a culture of stability" to reduce the risk of a financial crisis.
In its Autumn bulletin, the bank also warned that inflation, especially in the services sector, was eroding competitiveness.
Historically low interest rates coupled with an inflation higher than the euro zone average is increasing house prices, the Central Bank said. In this context the bank advises borrowers not to overstretch themselves for fear of being caught out when interest rates inevitably rise.
The bank said that the new financial services regulator IFSRA is meeting with the main lenders as a follow-up to inspections carried out earlier this year to assess the prudence of lending procedures. IFSRA will consider measures if it decides a tightening of lending practices is necessary.
The Central Bank also cut its key growth forecast for the Irish economy in 2004 but said its predicted level, if achieved, would still represent a reasonably good performance by international standards.
Gross national product (GNP), considered the best gauge of the Irish economy, could reach 2.75 per cent, a reduction from its forecast in the summer of 3.5 per cent, the bank said. It said goss domestic product growth was likely to reach around 3.25 per cent, down from a forecast per cent.
According to the bank, GNP growth this year could still reach 1.5 per cent - unchanged from its previous bulletin - but that gross domestic product growth was likely to be lower than the previously forecast level of 1.75 per cent.
The central bank warned that Ireland's competitiveness - eroded by an inflation rate that remained stubbornly higher than the eurozone average - could hinder the country's capacity to benefit from an eventual upturn in the world economy.
It also noted that consumer demand remained subdued and that investment inflows into the technology sector were unlikely to resume at the scale which underpinned the boom of the late 1990s.
"It's reasonably prudent to assume that the recovery next year won't be as strong as previously expected," Mr Austin Hughes, chief economist at Dublin-based IIB, said.
"The trend is improving but the recovery will not feel significantly different from the downturn this year," he said.
The central bank said although there was evidence of incipient recovery in the US economy, the indicators for the euro zone remained "much more mixed".
"The response of the euro area to any increase in external demand may also take some time to become well established and will depend, at least in part, on exchange rate developments," it said.
Weighted GDP growth in Ireland's trading partners was expected to pick up to around 2 per cent in 2004 from 1.25 per cent this year, it said.