AIB's latest economic outlook is warning inflation could peak at the higher rate of 7% if the Strait of Hormuz blockade continues for the rest of the year.
This compares to its base case forecast of 4%.
The bank says Ireland's domestic economy looks positioned for growth at a weaker rate than previously forecast due to increased global uncertainty.
Speaking on RTE's Morning Ireland, AIB Chief Economist David McNamara said following the invasion of Iran, and the rise in oil prices and other commodities the bank's forecasts have been "trimmed back" from its November report.
"There's still strong growth, about 2.5% in the European context for modified domestic demand. We expect inflation to increase up to 4% later this year," the economist said.
"That's well above the 2% target and what we had expected last year," he said.
"We also outline a diverse scenario where oil prices remain higher for longer, reach a peak of $150 a barrel, gas prices double from their current levels," he added.
However he also said the base case 4% inflation is a long way from 2022 levels of inflation when it peaked at nearly 10%.
Last year consumer spending grew by 3% and Mr McNamara said the the bank expects that to slow this year due to global uncertainty.
"Irish households have been very, very cautious in recent years, savings rates are around 14-15%. We expect that to tick higher and we expect the impact of higher inflation to blunt the ability of people to continue to increase their spending, but nevertheless, we expect consumer spending to grow by 2% this year and next year," he said.
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Following a 2.2% rise in employment in 2025, the report forecast employment growth slowing to 1.8% in 2026, 1.9% in 2027 and 2% in 2028.
Mr McNamara explained this slowdown in growth was expected after coming off a very rapid period of growth for the economy.
"Employment is up nearly 470,000 since the beginning of the decade, 20% extra, so we expect the impact of the uncertainty will likely see some businesses perhaps hold back on hiring.
"And we're seeing that in our PMI surveys to a certain extent, and also that natural slowdown in the economy as we reach capacity," said Mr McNamara.
"So we expect a slight slowdown in employment growth and a slight uptick in unemployment on the back of that, " he added.
Reacting to Bawag's acquisition of PTSB, David McNamara commented that from an economist's perspective, in any market, competition is better and you get better outcomes.
He said from a macroeconomics perspective, competition can be a good thing.
"If you look at the sector as a whole, you have bricks and mortar players like ourselves, but you also have digital players as well," he said.
"There's a huge amount of choice out there for consumers, so I think that's another addition to the market, albeit an existing player," he added.
