The European Central Bank (ECB) should raise interest rates as the euro zone economy grows, but its tighter policy should not move into "restrictive territory", IMF managing director Rodrigo Rato said today.
His comments come after the ECB signalled last week it would raise rates by a further 25 basis points to 3.50 per cent in December but left its options open for 2007.
"We see from the point of view of monetary policy the need to reduce the impulse, to become more neutral, especially as the recovery strengthens," Mr Rato said.
"But we doubt that it should move into what we could call restrictive territory, and of course it's not yet there."
Mr Rato said there was no contradiction between the European Commission's forecast of falling inflation and remarks by ECB Governing Council member Axel Weber yesterday that he was alarmed by inflation.
"The ECB has been clear that they have a medium-term approach to inflationary questions so it is perfectly compatible that they see an upswing in the first months of 2007," he said.
He added that the International Monetary Fund's own expectations were for inflation in the euro zone to decline by 2008, after upward price pressure from a rise in January 2007 in German value added tax.
Mr Rato, who praised the ECB for keeping inflationary expectations low, said the economic recovery in Europe had strengthened partly thanks to the bank's low interest rates.
Separately, in a statement, he also said that after years of above-trend growth in several countries, core inflation had generally risen, particularly in the United States.