Fears of a war in Iraq has put severe pressure on oil prices that have shot up from €28 a barrel to €31 per barrel in recent weeks.
Rising prices will also lead to global economic slowdown, he said.
Niall Dunne, chief economist at Ulster Bank Markets, said that with war in Iraq a near certainty, prices will shoot up to over €40 per barrel in the weeks ahead, putting severe pressure on the cost of petrol and domestic fuels.
Petrol pump prices have been reflecting the uncertainty created by the threat of war in Iraq for some time, he said. At present, petrol prices in the Dublin area range between 87c and 89c per litre.
With war almost imminent Mr Dunne said motorists could soon be forking out €1 per litre for their motor fuel.
“Experience of the Gulf War in 1991 saw oil prices peak at around €43 per barrel. But within a month that figure had fallen back down €28 despite the scorched earth policy deployed by Saddam Hussein as he left Kuwait,” he said.
Mr Dunne said the Middle-East crisis will, without doubt, impact on global economic output this year.
“It could knock a full 1% off GDP for 2003, depending on what the aftermath of the war brings,” said Mr Dunne.
In Frankfurt yesterday the ECB blamed rising oil prices for the hike in annual inflation rate in December to 2.3% against earlier forecasts of 2.2%.
Overall, Mr Dunne said the oil price situation puts further pressure on the Irish inflation rate.
Last week it hit 5% for December up from 4.8% in November.
With increases due to come into effect from the Budget this month, such as higher VAT and motor tax increases and the withdrawal of the first-time buyers grant, inflation could be propelled to the 6% figure that analysts spoke about last week quicker than previously imagined, said Mr Dunne.
In the short term the spike in ECB inflation to 2.3% puts the ECB mandarins in a quandary.
They recognise the need for another cut in interest rates, but will find it difficult to implement if they fail to meet their mandate of keeping inflation between 0 and 2%.
This is bad news for the German economy, which almost went into recession last year recording just a 0.2% growth in GDP.
The Germans are hinting strongly they need a cut and Mr Dunne suspects the ECB will not go below 2.5% for the key interest rate figure which leaves open the possibility of a cut of 0.25% in the months ahead from the current 2.75% figure.
That low of 2.5% was last reached in 1999 and it is the lowest it has been since the ECB started to set rates for all of Europe.
Given the inflationary pressures, Mr Dunne rules out a bigger cut of 0.5% in the coming months as suggested by AIB Capital Markets in its latest review out today.