bank market and large sterling liquid assets were held there by irish banks. measures were taken in the 1960s, within the constraints of the monetary union with sterling, to promote a domestic money and foreign exchange market. the link with sterling began to be questioned in policy circles as we imported a high and volatile inflation rate from the uk during the 1970s. this monetary and exchange rate regime continued until the opportunity to join the european monetary system arose in 1978 with the prospect of linking the irish pound to the more stable core eu economies, an important milestone in the movement towards a single currency. the new exchange rate arrangements provided a major impetus to the domestic money market and led to the establishment of a range of liquidity management instruments by the central bank. for some considerable time the central bank continued to be the dominant player in the domestic money market until more active market - making by financial institutions began to develop. the early years of ireland ’ s experience in the european monetary system were difficult. on the one hand, domestic macroeconomic policies were somewhat undisciplined. in particular, problems arose from inconsistencies between the exchange rate regime and the monetary financing of public sector deficits. there emerged what amounted to a carousel effect whereby money market imbalances deriving mainly from the monetisation of the government deficit were placing continuing downward pressure on the exchange rate. in turn, the exchange rate was supported by using the proceeds of government foreign currency borrowing. this was an unstable situation that could not continue for very long. a second issue, which arose somewhat later, was the volatility of sterling against ems currencies, including the irish pound. on two occasions, two sharp sterling depreciations led to downward realignments of the irish pound within the ems. as i have said, a significant reorientation of economic policies occurred in the mid 1980s. this entailed a devaluation of 8 per cent within the ems, substantial cuts in nominal public spending and a commitment on the part of the social partners to low nominal wage increases in exchange for cuts in income tax. these tax rates had risen substantially as the country tried to cope with the fiscal imbalances in the first half of the 1980s. all of these changes contributed to a turnaround in economic performance. gradually, economic conditions in ireland began to improve. foreign direct investment inflows, particularly from the us in high technology sectors, began to rise. from the mid - 1990s the irish economy grew very strongly, with

example, the government had a surplus of 0. 2 per cent of gdp. the stock of debt is one of the lowest in the eu — 33 per cent of gdp — down by two thirds on its level twenty years earlier. in the structural area, ireland has made relatively good progress in implementing labour and product market reforms aimed at improving competition and flexibility. this has played an important role in mitigating the economic fall - out from asymmetric shocks in a monetary union. ireland ’ s relatively good record in these areas is borne out by the eu commission ’ s recent review of countries ’ performance in implementing the eu ’ s broad economic policy guidelines. the current outlook as i have indicated, the global slowdown and, more specifically for ireland, the negative shock to the information and communications technology sector in 2001, has resulted in a significant slowdown in economic growth from what was clearly an unsustainable pace over the long run. for the current year, the bank expects growth of a little over 3 per cent of gnp, as the pace of the international recovery picks up. the recent sharp fall in inflation to about 2 per cent is a welcome development as price levels in ireland compare somewhat unfavourably with the rest of europe, due to several years of relatively high inflation rates. in terms of current challenges and prospects, the rapidity of the real convergence process has placed significant strains on domestic infrastructure, which requires further sustained investment. in the convergence period and the run up to emu, ireland benefited significantly from eu structural and cohesion funds, which provided a significant boost to domestic infrastructure projects. as our economy improved these transfers have decreased over time. the national development plan 2000 2006 outlined a substantial programme for improving and expanding domestic infrastructure, amounting to over €51 billion over the life cycle of the proposals. investment in the capital stock, including infrastructure, in education and training and in research and development must continue if future growth potential is to be realised. a second area of concern has been the large and persistent increase in the price of housing over the last decade. new house prices have increased by 183 per cent between 1995 and 2003, an average increase of nearly 14 per cent a year, while existing house prices have increased more rapidly still. this has been accompanied by continued strong increases in residential mortgage lending in the 20 to 25 per cent range for a number of years. demand for housing has undoubtedly increased significantly in recent years due to strong fundamental factors such as income and employment growth