OECD calls on ECB to cut rates

The Organisation for Economic Cooperation and Development (OECD) has urged the European Central Bank (ECB) to cut rates further.

The OECD said on Wednesday in its semi-annual Economic Outlook that the ECB should lower its benchmark rate despite the rate already being at a record low.

"The ECB has cut its main policy rate less aggressively [than the Federal Reserve and the Bank of Japan], with the rate on the main refinancing operations at 1%. The grim outlook for economic activity in the euro area and widespread evidence of falling inflation call for exhausting the remaining scope for cutting the rate on the main refinancing operations sooner rather than later," the report said.

The OECD revised its 2009 growth forecast for the eurozone from -4.1% to -4.8% and for 2010 it now predicts zero-growth from a previous estimate of -0.3%. The ECB's policy rate now stands at 1%.

However, the OECD's calls are likely to meet with resistance in Frankfurt.

Axel Weber, the president of the Bundesbank, said on Tuesday that the Governing Council had used the room available for rate reductions. He said loosening policy further was not necessary at the moment, given the central bank's provision of unlimited liquidity to banks and its plan to buy covered bonds.

Marco Annunziata, the chief economist of the UniCredit Group, said that the OECD's macro analysis was "right on the mark, and confirms that the eurozone will need sustained policy stimulus for quite a while still." It was, he said "way too early to implement an exit strategy." However, Annunziata said that the pressure on the ECB to cut rates further was "perhaps a bit ungenerous."

He said that the ECB's €442 billion ($619.7 billion) offer of unlimited one-year funds on Thursday represented a substantial amount, and confirmed that this new measure was an "important addition to the ECB's arsenal." "While I would also have favoured a more transparent zero interest-rate policy, there is no doubt that these quantitative measures are very well targeted and should prove effective in averting the risk of a credit crunch," Annunziata said.

Click here to read the speech (in German only)

Click here to access more information about the OECD report