An economist has forecast that the inflation rate could fall sharply next year as the series of interest rate increases from the European Central Bank comes to an end.

Bank of Ireland's Dr Dan McLaughlin said inflation would average 4.8% this year, but could drop to 2.7% in 2008.

In his quarterly economic outlook, the economist reiterated his forecast for 6% GDP growth this year, falling to 5% next year. He said household incomes should grow by 9.5% this year, helped by jobs growth, wage increases and higher rental income.

Dr McLaughlin expressed 'puzzlement' at some of the recent economic commentary, saying that it was unclear why growth in consumer spending should slow next year, while strong exports had picked up despite claims that Ireland was rapidly losing competitiveness.

On housing, he said a fall in residential activity would be offset by strong growth in other areas of construction.