The Central Bank's annual report gives the economy a mixed review. It has so far been resilient in the face of a nasty international downturn, it says. Most of the gains of the boom years have been maintained and unemployment, while rising, remains relatively low.
However, the bank does have concerns. It warns that declining competitiveness still threatens to stall recovery and that the property market could be vulnerable if the economy was hit by an unexpected shock.
The bank has been consistent in its analysis of the economy over the past year or so and a recurrent theme has been the need to safeguard competitiveness. This can only be done through bringing down the rate of inflation and taking other measures to improve the productivity of the economy. It will not be an easy task, as inflation here, while falling, remains above the EU average. In addition, any further rise in the value of the euro will undermine the competitiveness of companies exporting to the US and the UK.
The other main area of concern for the bank is the property market. It warns that banks and building societies could be tempted to extend overly-large loans in an attempt to boost profits. IFSRA, the financial regulator connected to the Central Bank, is currently reviewing the lending policies of the institutions. While the Central Bank governor, Mr John Hurley, said that this review is not yet complete, it is clear that the bank fears that prudence has taken a back seat to profit in lending policy and that both lenders and borrowers could be vulnerable in the event of a sustained downturn.
With interest rates now set in Frankfurt, the Central Bank here has lost its main policy weapon. Mr Hurley may sit on the European Central Bank governing council, but it is clear that euro interest rates are set by reference to the conditions in the big member-states. So while the Central Bank here would have preferred higher interest rates to slow lending and cool the housing market, there is now a possibility that rates might even fall further. In turn, this could further fuel mortgage lending.
As the Central Bank says, recent history is "replete with examples" of financial crises being preceded by rapid loan growth and asset price escalation. This puts a heavy onus on IFSRA, in its assessment of lending policies, and on the bank itself, which retains overall responsibility for the stability of the system. There is also, of course, an onus on the financial institutions and their borrowers to behave sensibly. However, the continued rise in house prices and the pressure on bank branches to maximise profits mean that this may not always happen.