Ireland Central Bank
A woman leaves the Central Bank of Ireland in the Temple Bar area of Dublin. Reuters

Ireland's Central Bank has upgraded its forecast for GDP growth in 2014 from 2% to 2.5%.

The bank attributed the uptick to a recovery in export growth, which stalled last year because of poor external demand and patent expiry on pharmaceutical products.

"In addition, domestic demand is projected to make a positive contribution to GDP growth this year led by a strong rebound in investment and modest growth in consumer spending. Overall GDP growth is projected to increase to about 2.5%, with GNP increasing by 2.8% in 2014," the bank said in a note issued on Monday.

The bank draws a direct link between Ireland's bailout exit and the growth in external demand and recommends continuing along "agreed commitments" in 2015 for this to continue. This means sticking to unpopular austerity measures, which have led to a long-term reduction in government investment.

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The bank statement said: "The priority, acknowledged by government, remains to reduce the deficit-to-GDP ratio below 3% in 2015. This is a high profile target that calls for special prudence in budgetary planning, ideally with an additional provision for some buffer to guard against adverse shocks."

The recent local and European elections made it clear how unpopular austerian policies have become. While Taoiseach Enda Kenny's Fianna Gael remained the largest party, it lost 6.8% of its vote, with coalition partner Labour losing 8.6%.

The economic growth boost will be welcomed in many quarters, but the fact that unemployment is still languishing at 11.6% shows that the recovery is not being felt by everyone in Ireland. However, the bank points out that it has come down significantly since its 15% peak in 2012.

It has forecast the economy to grow by 3.3% in 2015, a slight increase on its previous forecast of 3.2%.

Meanwhile, the bank has changed lending legislation to allow hedge finds to become lenders of note in Ireland. The country's recovery has been stunted by a lack of bank lending.

According to European Central Bank data, June saw the sharpest fall in bank lending to companies and individuals since October 2011. It fell by 10.8% year-on-year, continuing along a trajectory that has plagued the republic since the crisis hit in 2008.

Head of markets policy at the bank Martin Moloney confirmed that funds would be "subject to some additional regulation" to maintain financial stability. The plans dictate that hedge funds won't be permitted to lend more than 25% of its assets to a single borrower, nor will they be permitted to have more debt than assets.

"If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross-border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues," Moloney said.