The Central Bank has upgraded its forecasts for economic growth this year due to improved domestic prospects, but said external demand remains uncertain.
In its latest quarterly bulletin, the Central Bank said the external environment remains very challenging.
It noted further strains in financial markets and weakening consumer and investor confidence.
The bank said that GDP will grow 0.7% in 2012, raising its previous forecast from 0.5% to match the Government's forecast. But it cut its 2013 GDP forecast to 1.9% from 2.1%.
The Central Bank repeated its warning that the outlook is subject to a high degree of uncertainty related to the prospects for external demand.
It added that the adverse impact of weakened external demand will be partially offset by competitiveness gains and a pick up in the performance of exports is expected in 2013.
Today's bulletin said that the Government is on track to meet its deficit targets under the EU-IMF bailout programme.
But it warned that euro zone leaders' indications that the country's debt burden may be reduced should not be taken as an excuse to reduce efforts to elimiate the deficit in the medium term.
The bank also urged the Government to boost competitiveness to ensure exports are not undermined by changes in currency exchange rates.
On the labour market, the Central Bank said it remains weak, although the pace of decline in employment has moderated. The bank projected that unemployment is set to average 14.7% this year, and will fall slightly to 14.4% in 2013.
The bank said that underlying inflation is expected to remain ''subdued'' this year due to continued weak pricing power for firms in the face of restrained consumer spending.
Lending to households down 3.7% in June
The annual rate of decline in loans to households eased to 3.7% in June from 3.9% in May, new figures from the Central Bank show.
The bank said a drop in lending for house purchases and consumption again accounted for much of the overall reduction in lending. The rate of decline has remained relatively steady for the past six months.
Lending to households rose by €55m in June, following a net monthly reduction of €264m in May.
The figures also showed that Irish owned banks accounted for €75.8 billion of the €88 billion Irish-based lenders had borrowed from the European Central Bank at the end of May, nearly flat from a month earlier.