The European Central Bank (ECB) should cut interest rates by half a percentage point as a precaution against slower US growth, the Organisation for Economic Co-operation and Development (OECD) said yesterday.
Cutting its forecast for eurozone growth from 3.1 per cent to 2.6 per cent in its latest twice-yearly outlook, the OECD said a cut in the ECB's main refinancing rate from 4.75 to 4.25 per cent was expected by summer. Its comments will add to pressure on Mr Wim Duisenberg, the ECB president, who has already come under fire for the bank's failure to act.
The Paris-based think-tank said the US economic slowdown would be short lived, with a recovery likely later this year.
A steep fall in stock markets could hit US consumer spending, tipping the world's biggest economy into recession. But the OECD's central projection is that the US slowdown, though sharper than expected six months ago, will not last long. Mr Ignazio Visco, the OECD's chief economist, said a euro zone rate cut would be a good precautionary move. But he added: "The ECB is best placed to decide not only how but when to cut interest rates. We are not aggressive in asking them to do anything."
Mr Visco said the recent appreciation of the euro, a fall in oil prices and weaker external demand would ease inflationary pressure in the euro zone. "Monetary policy could be eased more aggressively if the slowdown were to intensify," the report said.
But Mr Otmar Issing, ECB chief economist, said in London that the short-term outlook for inflation was "not so good" after rises in food and energy costs.
In its report, the OECD said: "The forces putting downward pressure on global growth will dissipate and, except in Japan, a moderate recovery is expected later this year." The US economy would grow 1.7 per cent in 2001, a downward revision from the previous forecast of 3.5 per cent and a sharp slowdown from 5 per cent growth in 2000. Output would rise 3 per cent in 2002 as households began to benefit from planned tax cuts and business investment recovered. The projection assumes the US Federal Reserve will make another small interest rate cut.
The global downturn has had "a greater psychological effect than any real effect", he said. Euro-zone growth would stay at or above its long-run potential.
The OECD described its projection for growth in the 30 countries it represents as "relatively optimistic".
But the outlook for Japan was bleak, the OECD said. Struggling with falling exports and a fragile banking system, the Japanese economy was "faltering and at risk of entering a downward spiral". The $1,350 billion (€1,513 billion) tax cuts planned by President Bush over the next 11 years would provide little stimulus to the economy in 2001 or 2002. The OECD urged the administration to reform the tax system, saying there was scope to reduce disincentives to work.
