BRUSSELS, July 31: Higher eurozone interest rates might be in order to curb inflation and member governments should resist the temptation to ease budget targets when the economy is strong, the International Monetary Fund said on Tuesday.

In an IMF executive board evaluation of the eurozone economy, the fund said the combined economy of the 13 eurozone member states was doing well, with gross domestic product (GDP) growing at around 2.5 per cent per year and lower fiscal deficits than a few years ago.

“The outlook is the best in years,” the IMF directors said in their report.

“The euro area economy is doing well on the heels of a supportive external environment and generally sound policies”.

But IMF directors noted that with resource utilisation on the rise, “inflationary pressures could be expected to build gradually and some further monetary policy tightening might be required.”

The amount of tightening required would depend on wage and price rises and the extent to which productivity continued to rise, the IMF said.

And while eurozone governments had in general adopted strong fiscal policies and broad-based structural reforms, the IMF directors said: “Given the good economic times, they considered it particularly important not to repeat past mistakes and loosen fiscal targets in response to abundant revenues.”

The IMF staff projected that economic growth would “remain above potential over the near term” and expected employment gains “to stay healthy thanks in part to reforms to labour markets and welfare systems.”

It saw the eurozone economy expanding by 2.6 per cent this year and by 2.5 percent in 2008.

But the report also warned that as the eurozone population aged, it “was likely to prompt a significant slowing of potential growth.”

Because trade has traditionally boosted European economies, the IMF urged eurozone governments to help complete the troubled Doha round of trade negotiations before the World Trade Organisation.

The fund “encouraged the (eurozone) authorities to resist protectionist pressures and agree to additional trade liberalisation, in particular in agriculture.”

The IMF report also indicated that integration of the European Monetary Union’s financial sector was “key for the EMU to deliver its full potential” and to stimulate continued growth.

While recognising that achievements here were “major” the report said that obstacles remained.

Finally, the report said that despite the euro’s rise against the dollar and the yen, the single European currency’s effective exchange rate “remains broadly in line with medium-term fundamentals”.—AFP