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Headline inflation to rise 2.2% – Central Bank

The Central Bank first quarterly bulletin this year shows modified domestic demand has had a modest downward revision.

It is forecast to grow by 2.7% in 2025 and 2.4% on average in 2026 and 2027.

Headline inflation is projected to rise to 2.2% in 2025 before declining to 2.1% in 2026, and further easing to 1.4 % in 2027.

While the outlook is challenged by global events, the domestic economy has for the most part continued to perform well, the regulator states.

Robert Kelly (director of economics and statistics), pictured, said: “A significant rise in policy uncertainty in recent months is the most prominent feature of the current economic outlook. 

“That rise in uncertainty, is proportionately large in comparison to the available data, it centres on the shift in geoeconomic relationships brought on by the signalled policy stances of the new US Administration, and the prospective responses from other major economies. 

“Widespread announcements and implementation of tariffs and non-tariff barriers, and the need for Europe to evolve geopolitical priorities, present a very different landscape for the Irish economy than we have had in recent years,” he said.

While the Central Bank points to a steady pace of domestic growth out to 2027, the shift in policy uncertainty weighs on the outlook and could mean slower growth, he said.

The unemployment rate is at historic lows with jobs growth continuing, he said.

“These combine to underpin our central expectation that domestic inflationary pressures will remain in check over the forecast horizon, despite some near term elevation in energy prices which contribute to a higher forecast for HICP inflation in 2025.“

Overall export growth of around 5% per year is projected by the regulator, with continued expansion in pharma and IT services exports.

However,  this forecast is sensitive to any further deterioration in global trade including from potential new tariffs, the Central Bank said.

Households’ real incomes are forecast to continue to rise due to favourable labour market conditions.

Despite a closer alignment of labour demand and supply, overall conditions remain tight and the unemployment rate is projected to stay close to its current low levels – consistent with an economy near full employment.

Services are expected to be the main driver of inflation but energy costs have been revised upwards based on updated global commodity price assumptions.

“Continued high levels of net inward migration and increases in labour force participation are forecast to boost labour supply in the coming years,” the Central Bank said.

However, the Irish economy, public finances and labour market are highly exposed to changes in US economic policy and any broader deterioration in the global trading environment, it adds.

Infrastructure constraints 

There is a risk of higher and more persistent inflation unless infrastructure constraints are adequately addressed in a timely manner, it said.

“This risk would be aggravated if an overly expansionary fiscal stance emerged which created excess demand in the economy.

“Such an outcome would result in a deterioration in Ireland’s relative international competitiveness,” the regulator concludes.

Public policy needs a clear orientation to build long-term resilience in the economy and the public finances, it added.