Irish central bank cuts economic growth, inflation forecasts

DUBLIN (Reuters) - Ireland's central bank cut its economic growth forecasts out to 2025 for the second successive quarter, saying on Tuesday that the economy had shifted to a slower growth path but that inflation would also fall faster than previously forecast.

The central bank reduced its forecast for modified domestic demand (MDD) - it and the government's preferred measure of economic activity - to 1.5% in 2023 from 2.9% previously, while making more minor downward revisions to the 2.5% and 1.9% growth seen in 2024 and 2025.

MDD soared by 9.5% last year but the most recent reading showed it flatlining in the third quarter.

The central bank said the slowdown reflected the exceptional level of physical investment by multinationals in 2022, but also also the impact of higher interest rates and capacity constraints.

"The economy has shifted onto a slower growth path following a strong post pandemic recovery," the bank said in a quarterly update of its forecasts, noting that the economy was now set to grow in line with its medium term potential from 2024 to 2026.

Large foreign multinationals based in Ireland often distort gross domestic product (GDP), notably through the inclusion of exports produced abroad but counted in the Irish statistics. The measure is still used to calculate Ireland's share of activity across the euro zone.

The central bank reiterated that GDP does not provide a good indicator of economic conditions in Ireland when slashing its forecast for 2023 to a decline of 1.3% from the 2.9% expansion it expected three months ago.

The bank said headline inflation continues to decelerate, with tentative signs of a return to normal seasonal patterns. It cut its 2023 Harmonised Index of Consumer Prices (HICP) forecast to +5.2% from +5.4% and to +2.2% in 2024 from +3.2%.

It expects inflation to fall to 1.4% in 2026, below the European Central Bank (ECB) target of 2%. Core inflation, which excludes unprocessed food and energy prices, is expected to be stickier next year but fall below 2% in 2025.

(Reporting by Padraic Halpin; Editing by Chizu Nomiyama)