OECD warns against euro zone interest-rate rises

Raising interest rates before the end of the decade could threaten the long-sought after economic recovery in the euro zone, the Organisation for Economic Co-operation and Development (OECD) has warned.

In its interim economic outlook released on Tuesday, the OECD said it does not expect the European Central Bank to begin raising rates until 2020 given below-target inflation and continuing slack in local labour markets.

The organisation warned that raising rates too quickly “could weigh on the recovery in countries with high unemployment and large output gaps”.

Rates

The ECB is committed to keeping rates on hold “well past” the end of its bond-buying programme, scheduled to continue until at least next September.

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The intergovernmental economic organisation said the ECB’s recently-announced plan to trim the pace of asset purchases “is welcome to avoid disruptions in financial markets and anchor interest rates at a low level”.

Despite its caution over raising rates, however, the OECD was still more optimistic about the euro zone’s growth and inflation prospects than the ECB itself.

The Paris-based group is forecasting economic growth of 2.2 per cent in 2018, slowing to 1.9 per cent in 2019. That compares with the ECB’s latest projections of a 1.8 per cent expansion in 2018, followed by growth of 1.7 per cent in 2019.

Similarly, the intergovernmental economic organisation expects headline and core inflation to pick up to 1.7 per cent by 2019 – still below the ECB’s aim of “at or slightly below” 2 per cent, but better than the central bank’s own forecast of 1.5 per cent.

Growth

The organisation said rising employment “should boost incomes and support private consumption” despite sluggish wage growth, while strong business confidence and rising corporate profits will boost investment.

However, it added that “labour market slack is probably bigger than the unemployment rate suggests”, and said unemployment will likely remain above pre-crisis levels in “many countries”.

– Copyright The Financial Times Limited 2017