German economic think tank Institut fuer Weltwirtschaft (IfW) said it expects the European Central Bank to raise its key interest rate to 3.50 pct from the current 3.00 pct by the end of 2006. "We expect that the ECB will raise the main interest rate in two steps to 3.50 pct by the end of this year," the institute said in a research paper. It said 3.50 pct nearly corresponds to the neutral level, which is the level at which the economy will no longer derive any additional stimulus. The ECB has raised its main interest rate from 2.00 pct to 3.00 pct over the past nine months and is widely expected to increase it again at its next monetary policy meeting on Oct 5 in Paris. "The ECB has made clear that interest rates will be raised further. An important reason is the fact that the staff projections have been raised repeatedly for both GDP growth and the inflation rate," the IfW said. "The probability that inflation will be above the (ECB's) target in 2007 has increased further," it added. On the euro zone economy, the institute said growth will remain "rather strong" in the remainder of this year, with real GDP estimated to increase 2.7 pct year-on-year in 2006 -- the highest rate since 2000. Euro zone economic growth is then expected to slow to 2.0 pct next year. "In 2007, the expansion will lose some more momentum as the boom in the world economy will come to an end and domestic demand will be dampened by tighter monetary conditions," it said.