the slowdown in house prices, the main concern now is both the rapid growth and high level of indebtedness in the economy. total private sector credit is growing at an annual rate of about 25 per cent. there is no longer any doubt that the private sector is highly indebted by international standards and this level will very soon match the levels recorded in europe ’ s most indebted economies. the ratio of debt to disposable income of the household sector is now in excess of 120 per cent and is growing very strongly. regarding the mortgage component of private sector credit, it can be expected that the slowdown in house price increases and, in time, a reduction in housing volume to more sustainable levels should also lead to a slowdown in mortgage credit growth. however, we will remain concerned until we see some evidence of such a slowdown. the point of most concern about the high and growing level of indebtedness is that it is occurring at a time of historically low interest rates so that any significant increase in rates or downturn in economic activity in the future would cause problems, particularly for recent and more highly indebted borrowers. looking further ahead, most indicators would point to the irish economy continuing to grow strongly at a rate of about 5 per cent over the next few years. as a very open economy, the performance of ireland is significantly dependent on the global economy, the prospects for which are broadly favourable. there are downside risks to these forecasts. internationally we have seen a sharp increase in oil prices and uncertainties remain in this regard. as i said earlier, unfavourable moves in exchange rates could also impact on growth. domestically, there are also some risks, the main ones being the high and growing level of indebtedness, threats to competitiveness and the expanded construction sector. turning briefly to fiscal policy, it should be framed in a way that provides a capacity to cope in the event of the downside risks to the economy materialising. such an approach would also help avoid overheating pressures in an economy that is growing at more or less full capacity. monetary policy and the euro area economy focusing on the euro area, the expectation is that growth will moderate this year from the increase recorded in 2004, which itself marked a recovery from successive years of extremely weak growth. however, the 2 per cent recorded last year masked a sharp slowdown over the course of the year. moreover, the increase of 0. 5 per

addition, the heavy weighting of the construction sector in the economy is a concern. this risk was highlighted last year in our financial stability report, which looked at the implications of a sudden correction in the construction sector. • as i already pointed out, the economy has lost competitiveness in recent years. given the already high price level in ireland and the rising cost base, every effort should be made to avoid a further erosion of competitiveness. an important element in this is to ensure that our productivity performance improves so as to avoid further losses. on the external side, the volatility in energy markets and the possibility of sharp changes in exchange rates arising from global imbalances continue to be the main risks facing the economy. ireland ’ s dependence on oil remains higher than most developed countries, thereby raising our exposure to movements in oil prices. similarly, with 60 per cent of irish exports going to countries outside of the euro area, the economy is more vulnerable to sharp movements in exchange rates than other euro area members. monetary policy and the euro area economy turning to the international background for the irish economy, developments have been broadly favourable. the global economy continued its robust expansion in 2005, withstanding most of the dampening influence of higher oil prices, and is projected to grow at a broadly similar pace in 2006. closer to home, the euro area recovery has gained momentum, with growth becoming more broadly based and sustained in the first - half of this year. while external trade continues to provide significant impetus to euro area growth, there are now also signs of an improvement in domestic demand. business confidence has strengthened significantly and we have seen a welcome recovery in investment. however, progress remains slow in relation to consumer spending, though there are some signs of improvement. forecasts and projections point to an improved euro area growth outlook for this year and next compared with the past two years, with economic growth of around 2 per cent projected for both 2006 and 2007. turning to euro area price developments, the headline rate of inflation has been above two per cent since the start of the year and is expected to remain above that level into 2007. risks to outlook for price developments remain on the upside and relate to the potential for further increases in oil prices, stronger pass - through into consumer prices than expected or further increases in administered prices or indirect taxes. in addition, risks to the medium to longer - term outlook are also being signalled by strong growth in the money supply. in the light of the various risks to the outlook