ECB has "good reasons" to raise rates: OECD

By Leigh Thomas

PARIS (Reuters) – The European Central Bank has “good reasons” to raise interest rates this week, and this would have little impact on weaker euro zone countries struggling with debt crises, the Organization for Economic Cooperation and Development said on Tuesday.

The ECB is expected to become the first major central bank to begin raising interest rates since July 2008 after inflation in the 17-nation euro zone hit 2.6 percent in March.

The OECD said central bankers increasingly need to focus on tackling inflation as the economic recovery takes root in major economies, adding that some of its members faced the risk of inflation becoming “un-anchored.”

“We see inflationary expectations creeping upwards a bit everywhere, I would say, in Europe, in the United States, in the UK,” OECD chief economist Pier Carlo Padoan said in an interview with Reuters.

“Central banks should keep inflation expectations under control,” he said.

The OECD also forecast that growth in the G7 excluding crisis-hit Japan would average 3.2 percent on an annualized basis in the first quarter and 2.9 percent in the second, after growth of 2.3 percent and 2.1 percent in the third and fourth quarters of last year.

The forecasts were broadly stronger than the Paris-based organization’s last forecasts in November but used different methodology so were hard to compare precisely.

“Growth perspectives are higher all across the OECD area, and the recovery is becoming self-sustained, which means there will be less need for fiscal or monetary policy support,” Padoan told a news conference.

He also told Reuters that a minor increase in ECB rates would have a limited impact on weaker euro zone countries as they are already paying high interest rates.

“That is not a source of concern. They would gain from inflationary expectations being (kept) down because this would keep market interest rates down,” he said.

“The ECB has a very strong record of keeping monetary stability at around 2 percent and this has helped growth. I don’t think (an ECB rate hike) will hurt European growth,” he added.


The OECD did not include Japan in its forecasts for G7 economies because of the uncertainty over the country’s economic outlook following the earthquake and tsunami there last month.

However, it said that in a first estimate the disasters might cut 0.2-0.6 percent percentage points off first-quarter growth in Japan and 0.5-1.4 points in the second quarter.

Some of the slowdown in activity could be offset by a reconstruction boom starting as quickly as in the third quarter.

The OECD saw growth in the three biggest euro zone economies — France, Germany and Italy — accelerating rapidly, expanding 3.0 percent as a group in the in the first quarter on an annualized basis and 2.2 percent in the second quarter.

That would mark a sharp upturn from last year when the three countries saw growth of 1.9 percent and 1.2 percent in the third and fourth quarters respectively.

(Editing by Hugh Lawson)

ECB has "good reasons" to raise rates: OECD