Mr. John McCarthy:

There are two factors driving it. One is external, the other internal. What drives Irish inflation for the most part is external factors. Inflation in Ireland is a function of the exchange rate and price developments elsewhere. Ireland imports world inflation, so to speak. We have seen a depreciation of the exchange rate against both the dollar and sterling since about the second quarter of this year. Everything else being equal, that will push up import prices in Ireland. We have incorporated that into our model. The second factor underpinning the upward revision is the strength of domestic demand. There is more demand-pull inflation. I do not think it will take off because there is still a lot of slack and spare capacity in the economy, the outward gap is still negative and there is still an unemployment gap. However, there is an improvement in domestic demand which is stronger than we had expected. That will, everything else being equal, lead to stronger inflationary pressures.