European Central Bank president Christine Lagarde on Thursday said the eurozone economy would fare "a lot better" than expected this year but warned that inflation was still too high.
Ms Lagarde, speaking at the World Economic Forum in Davos, said she hoped countries could avoid a painful recession as news had become more "positive" in the past few weeks.
The rhetoric has shifted from talk of a recession in the 20-nation group to "a small contraction", she said, with some major economies such as Germany possibly dodging a contraction altogether.
The ECB is expecting 0.5 per cent growth in the eurozone this year, according to its latest forecast. "So it's not a brilliant year but it is a lot better than what we had feared," Ms Lagarde said.
The cautious optimism comes as sky-high energy prices, which soared last year because of the war in Ukraine, have started to fall.
Mild winter weather has also helped, easing fears of gas shortages.
Lower energy costs have contributed to a drop in eurozone inflation, which peaked at 10.6 per cent in October.
Consumer price growth slowed to 9.2 per cent last month, fuelling hopes that inflation had passed its zenith.
But Ms Lagarde warned that inflation was still "way too high".
The ECB has already increased interest rates aggressively to tame inflation, lifting its key rates by 2.5 percentage points since July.
Ms Lagarde said further interest rate rises would follow to bring inflation back to the ECB's 2 per cent target.
"We shall stay the course," she said.