There’s an old saying that central banks are meant to take away the punch bowl just as the party gets started.

But with control of interest rates in Frankfurt, rather than Dublin, the Central Bank of Ireland has limited powers to dampen overall economic conditions. It has, of course, set mortgage lending rules that may now be dampening house price growth and has just tweaked bank capital rules.

In warning about overall economic conditions and trying to persuade the Government to be ultra cautious in its latest economic bulletin, it does not have an easy job. This is because the bank’s own economic forecasts are rosy, predicting strong GDP growth of 4.7 per cent this year and 4.2 per cent next year, with the unemployment rate heading below 5 per cent.

The bank itself is predicting modest enough growth in average earnings

The bank, however, says that the Government should focus on the risks, rather than on these optimistic predictions. It remains to be seen whether warnings about what might happen will be heeded.

On the home front, the bank remains concerned about the economy overheating. Traditionally, overheating is demonstrated by fast rises in wages and prices – as happened before the 2008 bust – and strong growth in bank lending. Currently the overall inflation rate is low – and will be well below 1 per cent this year – and the bank itself is predicting modest enough growth in average earnings, anticipated to rise by 2.5 per cent this year and 3.3 per cent next year.

Inflation

At the current stage of a normal economic cycle, there would be more inflationary signs but there has been nothing normal about the economy over the past decade, and low inflation is evident across Europe.

One interesting point made in the Central Bank’s quarterly bulletin is that the low rate of inflation is mainly due to trends in goods, affected by oil prices and exchange rates. In contrast, the price of services is rising and is expected to increase by nearly 2 per cent this year and 2.6 per cent next year. So in some areas consumers are starting to pay the price of strong growth.

The bottom line, according to the Central Bank, is that the Government needs to be cautious and should aim to move the budget into surplus next year

In the international arena, the Central Bank is also warning on the basis of what might happen. On Brexit, its forecasts for the economy are based on a withdrawal agreement being signed between the EU and UK.

Significant disruption

If this does not happen, significant disruption could occur and the cost of a hard Brexit – which it estimates as 40,000 jobs – could be paid earlier than had been feared.

The bottom line, according to the Central Bank, is that the Government needs to be cautious and should aim to move the budget into surplus next year and pay for extra infrastructure investment through higher taxes or lower spending elsewhere, rather than higher borrowing.

However, with political pressure to spend more and tax less growing, it remains to be seen if anyone in Leinster House is listening.