FRANKFURT The German economy, Europe's biggest, will shrink this year and inflation will stay above 2% at least through 2025, the Bundesbank said on Friday in a biannual update of its projections.

The new forecasts came just a day after the European Central Bank lifted interest rates for the eighth straight time and promised even more tightening, as inflation pressures keep exceeding expectations, despite a recession over the winter.

"The German economy is set to recover only arduously from the crises of the past three years," the Bundesbank said. "In particular, it is still struggling with the consequences of high inflation, though this is, at least, easing."

The Bundesbank now sees the German economy contracting by 0.3% this year, a worse outcome than the European Commission's 0.2% expansion projection. But the forecast is a slight improvement on the Bundesbank's own forecast for a 0.5% contraction made six months ago.

The economy will then grow by 1.2% next year and 1.3% in 2025, both below previous forecasts, the central bank said.

Inflation, targeted by the ECB at 2%, is seen at 6.0% this year, below the EU's 6.8% forecast. Price growth will then slow to 3.1% next year and 2.7% in 2025.

"Decisive monetary policy action is key to counteracting the economic and societal risks of more persistent inflation," Bundesbank President Joachim Nagel said in a statement.

The German central bank has long advocated tighter monetary policy even as its vast industrial sector suffers a deep downturn and Nagel earlier said he was not convinced rate hikes would be done before the end of the summer.

"With regard to inflation, risks are tilted to the upside," the Bundesbank said. "High inflation could become more entrenched if wages and profits rise even more strongly."

At 3.5%, ECB rates are at their highest level in 22 years and markets see them peaking at either 3.75% or 4% in September or October.

(Reporting by Balazs Koranyi; Editing by Andrew Cawthorne)