By Conor Humphries and Padraic Halpin
DUBLIN (Reuters) - Ireland's central bank on Friday raised its 2017 economic growth forecast sharply to 4.5 percent from 3.5 percent three months ago, citing stronger momentum at home and improved trading abroad, particularly in European markets.
Ireland's economy has been the best-performing in the European Union since 2014, but until April the central bank had spent a year nudging down its growth expectations, anticipating a blow from neighbouring Britain's vote to leave the EU.
It said on Friday that risks remained to the downside but, in the absence of an immediate Brexit hit, it was also marking up its gross domestic product (GDP) forecast for 2018 to 3.6 percent from 3.2 percent previously.
That put the central bank broadly in line with the Finance Ministry, which forecast in April that GDP would grow by 4.3 percent this year and 3.7 percent next year.
"Revised projections for growth this year and in 2018 reflect both stronger momentum in the domestic economy and improved prospects for external demand, especially from our European trading partners," Central Bank Chief Economist Gabriel Fagan said in a statement.
"As a small and open economy, Ireland continues to face economic risks externally. And despite there being little new information emerging to date, it is clear that the economic impact of Brexit on Ireland is set to be negative and material. At home, we must continue to prudently monitor the risk of overheating."
The bank forecast last year that in its most pessimistic Brexit scenario, where increased tariff and non-tariff barriers significantly reduce trade flows between Ireland and the UK, Irish GDP could be 3.2 percent lower over a period of 10 years.
It said on Friday that without any new information in relation to these risks, it had not made any further adjustments.
Fagan, however, said the uncertainty relating to what form neighbouring Britain's exit from the block will actually take could weigh on investment decisions in Ireland next year.
The bank has forecast that modified investment - a new measure that strips out some investment relating to volatile parts of Ireland's open economy such as aircraft leasing - will grow by 11.9 percent in 2017 and 10.3 percent in 2018.
"There is a lot of empirical analysis showing that uncertainty tends to depress investment. That is definitely a risk and one that could materialise," Fagan told a news conference.