The Central Bank has lowered its inflation forecasts, mainly due to an easing of concerns about the supply of oil and gas that were sparked by the war in Ukraine.

In its latest quarterly bulletin, the bank says that it expects the HICP measure of annual inflation to come in at 5% this year – down from its previous forecast of 6.3%. HICP is the harmonised measure used across the EU.

The bulletin warned, however, that “a significant amount of uncertainty about the precise path for inflation” remained.

The Central Bank added that reductions in public-transport fares and fees for third-level education had also helped to reduce core inflation, which excludes more volatile food and energy prices.

Resilience

Robert Kelly (Director of Economics and Statistics) said that the global economy had performed better than previously expected, and that the Irish economy was showing continuing resilience.

“As the year progresses, amidst a tight labour market, household real incomes are expected to recover gradually, supporting underlying growth in the domestic economy,” he stated.

The bank has also raised its forecasts for consumer-spending growth this year to 4.8%, due to the expected bounce in households’ disposable income.

Modified domestic demand, a measure of the performance of the domestic economy, is forecast to grow by 3.1% this year, slowing to 2.9% in 2024.

The unemployment rate is expected to stay at 4.3% to 4.4% out to 2025, with wages expected to rise by 6.4% this year.

Investment slowdown

It said that a positive boost to demand from lower inflation and a strong labour market was being “tempered somewhat” by higher interest rates.

The bulletin also warned that it expected investment growth to ease significantly after an “exceptionally strong” 2022.

“This slowdown is anticipated in both machinery and equipment investment, and in building and construction, with the number of new housing units expected to remain below 30,000 both this year and next,” the Central Bank said.

“Domestic policy has a significant role to play in how the economy adjusts to the negative supply-side shock that the war has brought about, with its consequences for national income and the medium-term productive capacity of the economy,” the bulletin stated.

It described measures taken by the Government to mitigate the impact of higher inflation as “significant”, but cautioned that these measures should be “unwound in a timely fashion”, in order to reduce the potential of adding to medium-term inflationary pressures and potentially creating a longer-term vulnerability in the public finances.