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OECD says ECB rate rises should be gradual; sees rates at 3.75 pct by end-2007
23/5/2006 10:00 London Time | story 0639



PARIS (AFX) - The OECD said the European Central Bank should only raise interest rates gradually, once there is clear evidence that the euro zone economy is picking up.
The ECB''s main refinancing rate is currently at 2.50 pct, following two interest rate rises, and markets expect the central bank to hike rates again next month.
The OECD said it expects rates to remain unchanged "initially" but then to be raised in several steps to 3.75 pct by the end of 2007.
"Monetary stimulus can be removed gradually, as evidence builds up that slack is indeed shrinking," the organisation said in its semiannual economic outlook.
But it said rates are only expected to increase again once hard data confirm that the economy has maintained enough momentum over the second quarter.
"Further removal of monetary accommodation should be based on tangible signs that slack is shrinking and that underlying inflation pressures are mounting," it said.
Hard data do not yet provide such unambiguous confirmation that slack in the economy is shrinking, it said.
The OECD said it expects euro zone inflation to fall back below 2 pct by the middle of this year.
Next year''s German VAT hike will push headline inflation back above 2 pct temporarily, but leaving this effect aside, there is little risk of inflation being significantly above 2 pct over the next two or three years, it said.
There is also a risk that the economic recovery may falter if it does not filter through to employment and household incomes, it said.
steve.whitehouse@afxnews.com
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