LISBON - The International Monetary Fund on Tuesday raised its forecast for Portugal's 2023 economic growth to 2.6% from 1% estimated a month ago, following the release of official data showing a strong expansion in the first quarter.

That exceeds the 1.8% growth projected by the government and the Bank of Portugal, but still means a sharp slowdown compared to last year's 6.7% as high inflation and rising interest rates are expected to hamper domestic demand.

The new forecast comes after an IMF mission assessed the country's financial and economic conditions between April 26 and May 5.

While expecting inflation to slow to 5.6% in 2023 from 7.8% last year, the Fund also warned that "core inflation is projected to be stickier given a tight labour market and elevated profit margins".

On April 28, Portugal's statistics body said the economy expanded 2.5% in the first quarter from a year earlier, beating expectations.

In 2022, Portugal registered its strongest growth in 35 years but the IMF said high inflation and tighter financial conditions were weighing on growth. It expected GDP expansion to stabilise at around 2% over the medium term.

It said that, despite sizeable measures to support families and businesses, Portugal's "fiscal position has improved significantly in 2022, reinforcing public debt reduction".

"In 2023, fiscal policy needs to remain non-expansionary to preserve fiscal space and support monetary policy, while being nimble if shocks materialise," the IMF said.

The government is targeting a budget deficit of 0.4% of GDP this year the same as in 2022. The debt-to-GDP ratio, which finished last year at 113.9% after dropping from over 125% in 2021, is expected to decline further this year to 110.8%.

(Reporting by Sergio Goncalves; editing by Andrei Khalip)