The Central Bank has warned that the macro-financial environment in Ireland remains challenging, despite tentative signs of economic recovery.

As Ireland leaves its bailout programme, the Central Bank has delivered a sobering assessment of the overall financial situation in the country, which it characterises as "fragile".

In its latest macro-financial review - which pulls together recent economic and financial data and is aimed at foreign investors - the bank said the economy is set for growth of about 2% of GDP next year.

However it said that if growth rates are lower than expected, the state could miss its medium term economic targets, particularly in relation to debt and deficit reduction.

And it said the combination of further austerity budgets and high levels of private sector debt will hold back domestic demand by constraining consumption and investment activities.

It also warned that highly indebted households remain vulnerable to a rise in interest rates or a fall in disposable income.

The Central Bank noted that house prices have risen nationally for the first time since January 2008, adding that the rise has been driven by supply shortages in Dublin.

It said the overall value of impaired bank loans continues to rise, though at a reduced rate.  The level of distress among small and medium enterprises (SMEs) it described as "particularly acute".

The level of impairment impacts the real economy and the financial system through a reduction in asset values of bank balance sheets, which in turn reduces banks' willingness to lend to the private sector.

The bank also said that doubts remain about whether banks are sufficiently provisioned to cope with the outstanding stock of distressed loans.

It said there have been some positive developments in the banking sector - notably a reduced reliance on funding from the ECB, strongly supported debt sales by the banks in financial markets, and declines in bank deposit rates - reducing banks cost of funding.

But "the overall profile remains fragile and vulnerable to swings in market sentiment", it cautioned.