More Advice For The ECB (And Everyone Else)

The OECD has issued Economic Outlook No. 78 and, while the news is generally good, the decision makers at the European Central Bank get some (presumably unsolicited) advice.  From the Wall Street Journal (page A2 of the print edition):

World economic growth is strengthening yet faces obstacles from worsening global imbalances, including U.S. deficits, and an interest-rate increase the European Central Bank plans as early as tomorrow, according to a report by the Organization for Economic Cooperation and Development.

The ECB shouldn't raise interest rates for the 12-nation euro zone until late next year to avoid smothering Europe's fledgling recovery, the OECD said. The Paris-based organization, which comprises 30 developed countries, stressed that it saw no evidence or prospect of inflation's spreading.

The OECD's challenge to the ECB follows warnings by the International Monetary Fund and top European politicians that the euro zone's economy remains weak, and inflation there remains benign.

"What you want to avoid is a situation where you have some tightening at a stage which may prove premature," said the OECD's chief economist, Jean-Philippe Cotis. "The problem is that we've had several episodes of aborted recovery" in the euro zone, he said.

Edward Hugh links to the story from the Financial Times, suggesting the response will be something like "thanks, but no thanks":

The ECB is expected on Thursday to risk a backlash by raising rates by a quarter percentage point to 2.25 per cent, the first rise in five years.

In the holiday spirit, perhaps, the OECD observers appear willing to accept that just this once:

Jean-Philippe Cotis, the OECD’s chief economist, said: “A one-step increase will not by itself have much effect. It will be interesting to get a fuller view of what the ECB strategy is.”

And here is an interesting twist:

It recommended that the US Federal Reserve continue to raise rates by another 0.75 percentage point to 4.75 per cent, but urged restraint in Japan until 2007.

The rationale for all this?  This is from Mr. Cotis' accompanying editorial:

In the United States, where aggregate demand is buoyant, there is a clear need for early fiscal retrenchment and tax reform to redress the saving/investment balance in conjunction with the current tightening of monetary policy. In Japan, mounting public spending pressures associated with ageing call for faster fiscal tightening, while monetary policy should keep a very easy stance until the output gap moves squarely into positive territory and deflation is definitively uprooted.

In the euro area, where underlying inflation has been steadily declining and economic slack remains entrenched, monetary tightening should wait until the recovery gathers enough momentum and becomes more resilient, which may take a few more quarters.

I guess fine-tuning and fiscal/monetary coordination are back in style. Apparently concerns about inverted yield curves are not.