The Central Bank expects the Irish economy to grow by 3 per cent this year, but warned that inflation remains the most significant risk to growth.
The bank advised policy makers that "caution and prudence" is now needed to guarantee future growth.
Delivering the Central Bank’s annual report in Dublin today, the Governor, Mr John Hurley said that, while 2001 was a challenging year for the Irish economy, the Bank’s view of Ireland’s prospects remains positive.
As a small open economy, Mr Hurley said Ireland’s fortunes are heavily dependent on external factors such a recovery in the US and a benign global political climate - both of which have deteriorated recently. The strengthening euro has also had a detrimental effect on Ireland’s competitive position in recent months.
The Bank said the Irish economy had come out of the recent downturn better than most other economies. The rest of the euro zone is also showing signs of recovery but this has yet to be seen in real material gains.
Mr Hurley said that the time had come to take action against domestic inflation which remains over two percentage points higher than the European average. He called on the new Government to take "careful and prudent" decisions on fiscal policy which would pay dividends in the years ahead.
If the correct policies are now adopted to curb inflation the economy has the potential to grow at 5 per cent per annum - twice the OECD average - the Bank said.
Rising costs in domestic firms has been a concern for the Central Bank for some time as cost inflation in this area has not been matched by commensurate productivity gains. The Bank again warned today that costs in the domestic economy would have to be controlled if jobs are not to be lost.
Speaking on the prospects for the upcoming talks on a new partnership agreement, Mr Hurley said social partnership had served the country well but the successor to the PPF must take into account the new conditions in Ireland.
The Central Bank made a profit of euro 563 million in 2001, an increase of €42.5 million on the 2000 figure. Of this €530.6 million accrues to the Exchequer as surplus income of the Bank.
The Bank also had a successful year in the management of its investment portfolio of €8.5 billion. The return on these assets was 6.74 per cent compared to 6.84 per cent in 2000 but ahead of the Merrill Lynch performance benchmark.