The European Central Bank (ECB) will likely keep interest rates stable over the next two years as inflation will stay below the upper limit of price stability targets in the euro zone, the Ifo institute said today.
"We have 3.5 per cent at the moment, and that's assumed for the forecast period," Ifo economist Klaus Abberger said as the think tank published its latest forecasts for 2007 and 2008.
Last week the ECB, which targets euro zone inflation of just below 2 per cent, raised its main lending rate to 3.5 per cent.
The Munich-based institute forecast that annual inflation in the 12-nation currency area would slow to 2.1 per cent in 2007 from 2.2 per cent this year.
The think tank added that a three percentage point increase in the rate of value added tax (VAT) in Germany from 2007 would likely boost euro zone inflation by 0.3 per cent next year. In 2008, Ifo saw inflation in the bloc slowing to 1.8 per cent.
It also forecast GDP in the euro zone would expand by 2.2 per cent next year after 2.7 per cent this year. In 2008, it predicted growth of 2.4 per cent.