OECD urges ECB to start quantitative easing/Eurozone inflation plunges to record low

OECD urges ECB to start quantitative easing
By Daniel Pimlott in London
Copyright The Financial Times Limited 2009
Published: March 31 2009 11:57 | Last updated: March 31 2009 11:57
http://www.ft.com/cms/s/0/18cdef6e-1dd7-11de-830b-00144feabdc0.html


The Organisation for Economic Co-operation and Development on Tuesday urged the European Central Bank to cut interest rates closer to zero and begin quantitative easing, as it forecast a deeper recession in Europe and Japan than in the US and UK.

The call to the ECB to begin creating money in order to head off deflation comes after the central bank has been less aggressive in cutting interest rates than its American and British counterparts.

While the Federal Reserve and the Bank of England have begun programmes of quantitative easing – increasing reserves in order to buy up government and corporate bonds – the ECB is still exploring expanding its range of monetary weapons to head off the recession.

The Paris-based thinktank warned in its quarterly forecasts for advanced economies that “the growing disinflationary pressures anticipated during the next two years” implied that the “remaining scope for cutting policy rates should be used quickly and quantitative easing policies implemented”.

Interest rates in the ECB currently stand at 1.5 per cent compared to 0.5 per cent in the UK and a range of between zero and 0.25 per cent in the US.

The call for further monetary stimulus in Europe came as the OECD forecast that advanced economies around the world will contract by 4.3 per cent in 2009 with little or no growth expected in 2010.

The whole world economy will shrink by 2.7 per cent this year, the OECD forecasts, before rebounding to a growth rate of 1.2 per cent next year.

“The downturn is the most severe and synchronised in post-war history,” the OECD said.

The call for further monetary stimulus in Europe came as the OECD predicted that one in 10 workers in advanced economies will be without a job next year. Other figures out on Tuesday showed that Japan and Germany have seen sharp increases in unemployment.

On Monday Angel Gurría, the head of the OECD, said that unemployment in the 30 advanced OECD countries would swell “by about 25m million people, by far the largest and most rapid increase in OECD unemployment in the postwar period”.

However, while the downturn will leave no advanced economies unscathed, the OECD is forecasting that it will be less severe in the US and UK, where banking systems have proved more fragile.

While the US is expected to suffer a 4 per cent decline in GDP this year, followed by no growth in 2010, the eurozone is set to contract by 4.1 per cent in 2009 and 0.3 per cent next year.

Within the eurozone, Germany is expected to see the worst recession, with a 5.3 per cent decline in GDP in 2009, with Italy suffering a drop of 4.3 per cent. By comparison the UK gets off relatively lightly with a 3.7 per cent drop in GDP in 2009 and a 0.2 per cent decline in 2010. Japan will suffer most of all with a 6.6 per cent decline this year and a further decline of 0.5 per cent next year.

The OECD appeared to call for further fiscal stimulus in Europe, a demand that is likely to strike a jarring note with Germany and others, who say they want to see the effects of stimulus packages already in place before embarking on another round of spending.

“Additional discretionary fiscal measures are also warranted in member countries that have sufficient budgetary scope,” the OECD said.

In the UK, the OECD warned that although further fiscal stimulus could be warranted if the recession gets much worse, there was not much scope for increased public spending or lower taxes due to the rapid deterioraiton in the public finances.

“The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans, in order to ensure that confidence is not eroded,” the report said. “In this regard, the formulation of a strong and credible medium-term fiscal framework would be helpful.”

The report shows world trade growth collapsed at a nearly 25 per cent annualised pace in the fourth quarter of last year, compared with an average of 8 per cent growth over the last 5 years. This was the sharpest contraction since records began in 1965.

Inflation would slow sharply across developed economies this year, with some experiencing prolonged periods of falling prices.

But it said that policy introduced so far would help the world avoid another Great Depression.

“The Great Depression was deepened by terrible policy mistakes, ranging from contractionary monetary policy to beggar-thy-neighbour policies in the form of trade protection and competitive devaluations,” the report said. “In contrast, this recession has broadly elicited the right policy.”





Eurozone inflation plunges to record low
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2009
Published: March 31 2009 11:31 | Last updated: March 31 2009 11:31
http://www.ft.com/cms/s/0/3d8c80ce-1dda-11de-830b-00144feabdc0.html


Eurozone inflation has fallen to a record low, strengthening the case for further European Central Bank action to boost the economy of the 16-country bloc and head off any risk of deflation.

The annual rate of eurozone price increases fell more than expected, from 1.2 per cent in February to just 0.6 per cent in March, according to an initial estimate on Tuesday by Eurostat, the European Union’s statistical unit.

That was the lowest since comparable records began in the early 1990s. Some economists calculated that it was the lowest seen in continental Europe for half a century. It also pointed to substantial undershooting of the ECB's target of an annual inflation rate "below but close" to 2 per cent.

Oil prices accounted for much of the fall but economists said the weakness of the eurozone economy almost certainly added significantly to the downward pressure on prices. Eurostat gave no details.

Spain earlier this week became the first eurozone country to report a negative annual inflation rate. The ECB is braced for the overall eurozone inflation rate to turn negative in coming months, and the unexpected weakness of the eurozone data could heighten fears that the region will enter a deflationary phase.

The ECB sees full-blown deflation – sustained and general falls in prices that wreak substantial economic damage – remaining a remote risk, largely because of rigidities in the eurozone economy.

Jean-Claude Trichet, ECB president, told the European Parliament on Monday that neither the ECB nor other international institutions considered the risk of eurozone deflation to be “elevated and substantiated”. But he added that “we have to remain permanently alert”.

The danger the ECB faces is that negative inflation rates fuel expectations about future trends in prices that become deflationary. A European Commission report this week showed that the rate of price increases expected by eurozone consumers for the next 12 months was the weakest since its survey began in 1985.

The ECB is widely expected to cut its main policy interest rate by a further half percentage point to 1 per cent at its meeting on Thursday. So far its “non-standard” actions to combat the recession have focused on so-called “enhanced credit support” – the ECB’s answer to quantitative easing – by which it is flooding the banking sector with unlimited amounts of liquidity at low interest rates.

But the ECB is activity considering further steps, including the possible purchase of private sector debt. “The ECB’s work will not be finished with the rate cut expected on Thursday,” said Rainer Guntermann, economist at Commerzbank in Frankfurt.

The Organisation for Economic Co-operation and Development on Tuesday urged the ECB to cut interest rates closer to zero and begin quantitative easing, as it forecast a deeper recession in Europe and Japan than in the US and UK.

The Paris-based think-tank warned in its quarterly forecasts for advanced economies that “the growing disinflationary pressures anticipated during the next two years” implied that the “remaining scope for cutting policy rates should be used quickly and quantitative easing policies implemented”.

Additional reporting by Daniel Pimlott