BERLIN, Sept 11 - Germany's Kiel-based Institute for World Economics (IfW) lifted on Thursday its budget deficit forecast for Germany but cast doubt on whether the European Commission would strictly implement the EU's budget rule book. The IfW, part of the Europe-wide Euroframe group of economic think tanks, said in its latest report on the euro zone economy it expected Germany's budget deficit to hit 3.6 percent of gross domestic product this year and 3.8 percent of GDP in 2004. It had previously forecast budget deficits of 3.5 percent in 2003 and 3.2 percent in 2004, above the three percent limit set in the EU's budgetary Stability and Growth Pact. "According to the Pact, Germany must this year or at the latest by next year bring its budget deficit back below three percent of GDP to avoid sanctions. This is not to be expected, given what we already know about this year's budget and the government's plans," the institute wrote. The government has already announced it expects Germany's deficit to reach at least 3.8 percent of GDP this year, but says its budget plans should be enough to reduce the deficit below three percent in 2004, although it admits that will be hard. "According to the rules of the Pact, the European Commission must propose appropriate measures to avoid the three percent level being breached. It is however questionable whether it will do this," the think tank said, citing criticism of the Pact by European Commission President Romano Prodi. "The real test is therefore to come. If the Commission does not act according to the letter of the Pact it will effectively be scrapping it. It would then be hard to explain to European citizens the points of having European rules and regulations," it said. Separately, the institute said it saw no need for the European Central Bank to reduce interest rates again if, as it expects, the euro zone economy picks up in the fourth quarter but expects ECB policy to be on hold for another year. "Nonetheless it will be some time before the central bank can tighten the reins...We don't expect the key interest rate to be increased already next year," it wrote.