Headline inflation in the Irish economy could double to 4.2 per cent in the coming months if there is a prolonged conflict in the Middle East, the Central Bank has warned.
In its latest quarterly bulletin, the regulator said the current spike in oil and gas prices would lead to lower growth and higher inflation and that lower-income households would be “disproportionately” impacted.
The bank’s central projection, based on where oil and gas prices were on March 11th, sees inflation averaging 2.9 per cent this year.
However, “a lengthier conflict with significantly more disruption” could see inflation accelerate to 4.2 per cent, with growth in terms of modified domestic demand slowing to 2 per cent as households see their purchasing power squeezed.
Iran’s effective closure of the Strait of Hormuz has halted global shipments of oil and gas through the channel, triggering what the International Energy Agency has described as the largest ever disruption to oil supply.
“Higher energy costs have already been reflected to varying degrees across the price of different fuel types, and these are likely to have both direct and indirect effects on inflation facing businesses and households,” the Central Bank said.
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“This recent event in the Middle East, coming just four years after Russia’s invasion of Ukraine and the accompanying sharp rise in gas, oil and food prices, naturally leads to comparisons with that period,” it said.
“However, as of mid-March the current scale of the initial energy price shock is not as acute, with spot and futures gas and oil prices not persistently reaching the heights of 2022.”
The bank’s director of economics and statistics, Robert Kelly, nonetheless cautioned that its forecasts for inflation and growth might be “somewhat conservative” as they did not incorporate a shock to non-energy prices.
He highlighted the potential hit to food costs from higher fertiliser prices and the possible impact of tighter monetary conditions if central banks move to counteract the inflationary surge.
On Government moves to cut excise duty on fuel in response to the crisis, Kelly said while the measure was temporary, it was less targeted.
In a separate article on the likely impact of AI (artificial intelligence) on the lrish labour force, the Central Bank estimated that approximately one in seven workers here had “a high exposure but low complementarity” to the new technology, which means their roles could be replaced by AI.
On the outlook for housing, the Central Bank sees completions rising to a post-Celtic Tiger record of 40,000 this year and to 43,000 and 46,000 in 2027 and 2028.
“Higher housing output depends to a considerable extent on the delivery of necessary public infrastructure, including the implementation of the Accelerating Infrastructure Action Plan,” it said.
“This, alongside other measures to attract private investment, is warranted and feasible to achieve, considering the extent of private sector savings and the relatively low rate of investment over the past decade, especially by indigenous businesses,” it said.
In its report, the Central Bank noted that a large rise in exports of weight-loss related products up to the third quarter underpinned double-digit growth in terms of gross domestic product (GDP) in 2025, but quarterly out-turns have been erratic with exports slowing sharply in the final quarter of the year.
Overall cross-Border merchandise exports grew by 17.5 per cent in 2025, with 95 per cent of this growth accounted for by a single product group – polypeptide hormones.