The International Monetary Fund (IMF) today said the European Central Bank (ECB) should hold eurozone interest rates to keep "uncomfortably high" inflation in check.

The rate of inflation is expected to remain at 3 per cent for months.

The IMF’s backing for the ECB’s tough stance on fighting inflation came as the Washington-based fund raised its forecast for eurozone growth this year and next, having cut it in April.

In its annual health check on the 15-nation bloc, the IMF suggested that the eurozone has withstood global economic squalls better than it had expected and raised its forecast for its growth this year to “around 1.75 per cent”, from its April projection of 1.4 per cent. The fund said that the eurozone should see growth of 1.25 per cent in 2009 - up from its 1.2 per cent view in April.

With growth set to be stronger than expected, the IMF abandoned its previous suggestion that the ECB had room to lower eurozone interest rates and said that it should hold fire.

The IMF expects eurozone inflation eventually to subside after it hit a record 3.6 per cent in May, but predicted that it would not fall back to the ECB’s target of “close to, but below 2 per cent” until late next year.

“In these circumstances, it is appropriate to keep policy rates on hold,” the fund said.

However, it added that, if a slowdown in the eurozone creates slack in the economy and inflation eases, that could create scope for lower rates. It said that there was little sign of so-called “second-round effects”, where rising price pressures trigger inflationary wage demands, and argued that these risks “have essentially been kept in check”.

With the euro at record levels against the dollar, threatening the eurozone’s export prospects, the IMF hinted that the bloc’s exchange rate may have become overvalued, describing it as “on the strong side”, with the euro having borne a disproportionate share of the burden of the dollar’s global slide.

Almost 10 years after the single currency’s launch in 1999, the fund expressed its view that “monetary union is a distinct success”.

The euro area had offered “a zone of stability in the international economy”, it argued, adding: "Despite labour-market inefficiencies, labour costs have been subdued and employment growth remarkably strong.”

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