OECD says ECB should cut rates quickly

PARIS, June 24 - The European Central Bank should quickly cut its main refinancing rate because disinflationary pressures over the next two years are likely to grow, the OECD said in its twice-yearly report on Wednesday.

The ECB has cut interest rates by 325 basis points since October to a record low of 1 percent and has also announced it would buy covered bonds of companies to facilitate access to credit in the recession-hit economy.

"The growing disinflationary pressures anticipated during the next two years imply that the remaining scope for cutting policy rates should be used quickly," the Organisation for Economic Cooperation and Development said.

The ECB wants to keep inflation below, but close to 2 percent, but a sharp fall in oil prices brought annual euro zone consumer price growth to a halt for the first time in May and prices are expected to fall in June and July.

"Credit and liquidity easing policies (should be) implemented, provided that any difficulties arising from the euro area institutional framework can be overcome," the OECD said of ECB actions.

The OECD revised slightly down its forecast for euro zone inflation this year to 0.5 percent from 0.6 percent, and left its prediction for 2010 unchanged at 0.7 percent.

The ECB expects even lower inflation this year -- in a range of 0.1 to 0.5 percent and slightly higher in 2010 -- in a range of 0.6 to 1.4 percent.

The OECD also revised down its March growth forecasts for the 16 countries using the euro to a contraction of 4.8 percent this year from 4.1 percent but for 2010 it forecast zero growth rather than a 0.3 percent contraction as in March.

This is close to the ECB's mid-point forecast of a 4.6 percent euro zone contraction this year, but more pessimistic than the European Commission's forecast of a 4 percent fall in economic output in 2009.

Like the Commission, the OECD expects a gradual economic recovery in the euro zone in 2010.

FEW HAVE ROOM FOR MORE FISCAL STIMULUS

The OECD also now expects a slightly higher aggregate budget deficit in the euro area of 5.6 percent of GDP rather than 5.4 percent as in March, but has kept its forecast for 2010 unchanged at 7 percent of GDP.

The Commission sees the euro zone budget deficit at 5.3 percent this year and 6.5 percent in 2010.

"Some member states continue to have scope to provide additional stimulus in the short term, especially if the situation should deteriorate further... or if stimulus might otherwise be withdrawn too quickly," the OECD said.

But EU leaders said last week that no further stimulus measures were needed and it was time to focus to a consolidation strategy which should be implemented once recovery takes hold. The OECD also stressed the need for a credible plan to ensure medium-term sustainability of public finances.

One of the EU countries which did not have room for further fiscal stimulus was Britain, the OECD said, where the budget deficit was likely to reach 14 percent of GDP next year amid a severe recession of 4.3 percent this year.

"The (British) government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold," the OECD said, forecasting a mild recovery in 2010.

Also Poland, the biggest of the 10 countries that joined the EU in 2004, should look to consolidate finances once recovery begins in 2010 after a shallow recession of 0.4 percent in 2009.

The OECD pointed out that otherwise Poland's debt could breach the constitutional limit of 60 percent of GDP, but said the fiscal tightening should be accompanied by monetary easing.

There is little room for further discretionary fiscal stimulus in the Czech Republic either, but there is scope for further interest rate cuts, the OECD said.

Sweden, however, could spend more public money to support the economy and minimise unemployment, the OECD said, and the Swedish central bank could embark on outright assets purchases to reduce market interest rates and credit spreads.