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 yesterday.
The ECB has cut interest rates by 325 basis points since October to a record low of one per cent 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 Co-operation and Development said.
The ECB wants to keep inflation below, but close to two per cent, 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 per cent from 0.6 per cent, and left its prediction for 2010 unchanged at 0.7 per cent.
The ECB expects even lower inflation this year – in a range of 0.1 to 0.5 per cent and slightly higher in 2010 – in a range of 0.6 to 1.4 per cent.
The organisation also revised down its March growth forecasts for the 16 countries using the euro to a contraction of 4.8 per cent this year from 4.1 per cent but for 2010 it forecast zero growth rather than a 0.3 per cent contraction as in March.
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