The Central Bank has said that public and private sector wages need to fall further so Ireland can regain competitiveness.

The bank has marginally cut its growth forecast and increased its estimate for unemployment for 2012.

It has also called on the Government to cut the deficit more quickly than planned. 

It said this would shorten the period of uncertainty and help recovery.

In its latest quarterly bulletin, the Central Bank said GDP was expected to slow to 0.5% growth in 2012 compared to a previous estimate of 0.7%.

It predicted that GNP will contract by 0.4%.

That is expected to be followed by a pickup in growth next year to around 1.7% in GDP terms and 0.7% in GNP terms.

The bank has based its projection on some recovery in external demand next year, alongside a gradual stabilisation in the domestic economy.

Employment growth, the bank said, is not likely to emerge until next year at the earliest.

It welcomed a number of initiatives at euro area level but warned that risks remain, including a resolution to the sovereign debt and banking problems in Europe, and a marked economic slowdown at international level.

The Central Bank urges the Government to at least adhere to the deficit targets set out in the Troika programme, with a suggestion that it might go even further.

It stated: "Without increasing the overall scale of fiscal correction, there is a case for getting the adjustment over more quickly.

"This would shorten the already lengthy period of uncertainty which has been bad in itself and has doubtless slowed investment and other spending plans."

On the issue of pay, the Central Bank said remuneration remains too high in the public and private sectors, which it warns is discouraging expansion and investment by exporters.

It said reducing pay would make a significant contribution to improving competitiveness and productivity. 

In an interview with RTÉ News, Central Bank's Chief Economist Lars Frisell said wages were 10% higher than that of Ireland's trading partners.

Today's quarterly bulletin also said a recovery in consumer sentiment is expected to contribute to a stabilisation in spending this year, but a modest decline is predicted for next year.

The inflation rate is expected to come in at around 2% for 2012, slightly higher than predicted in the previous bulletin.

Inflation for next year is forecast to average at 1.3%, but the Bank warned that indirect tax measures announced in the Budget could affect the outcome.