IMF chief Christine Lagarde warned on Friday that low inflation could damage growth in Europe and urged the European Central Bank to maintain a flexible policy.
The former French economy minister also urged caution over asset prices, which she said could be too high in relation to fundamentals.
"Obstinately low inflation can seriously undermine growth," said Lagarde, who recently hinted that the 3.6 percent global growth forecast for 2014 might have to be trimmed.
The "good news," Lagarde said, was that "European economies are beginning to emerge from the crisis."
But the downside, she warned, was that investors could be a little too optimistic on a region that is still saddled with high unemployment and public debt.
"We are seeing this in a certain number of indicators. We are also seeing this in the very positive orientation of markets, perhaps a little too positive in respect to fundamentals," Lagarde said in a speech at the Robert Schuman Foundation in Paris. Lagarde did not specify which European markets were overly optimistic.
"Monetary policy should remain supportive until private demand has fully recovered "and the European Central Bank" has achieved its price stability objective," she said.
Last month the European Central Bank cut its key interest rates, including taking one into negative territory for the first time, in a bid to help the region's stalling economy emerge from the eurozone debt crisis.
Earlier this month, Lagarde had asked governments to boost public investment and help drive the global recovery.
The IMF head also warned against rising youth joblessness in Europe saying corrective measures were needed immediately if the continent wanted to remain a force in the world.
"Today when one looks at skills and jobs across the world, there is fierce competition," she said.
"From this point of view, youth unemployment which stands at an average of 24 percent in the EU countries is simply tragic," she said.