Bloomberg News

ECB Should Consider Measures From Rate Guidance to QE, OECD Says

March 28, 2013

The European Central Bank should consider giving more forward guidance and look at quantitative easing in an effort to revive euro-area growth, the Organization for Economic Cooperation and Development said.

“There is a strong case to ease monetary policy further, given weak demand and inflation well below the ECB’s objective,” the Paris-based organization said in a report today. “More specific forward guidance could be given by the ECB. Further thought should be given to how to expand quantitative easing.”

ECB policy makers gather next week in Frankfurt to consider their options in the face of a recession in the 17-nation currency bloc. The bank’s benchmark refinancing rate has been on hold at 0.75 percent since July last year.

“There is space for more traditional monetary policy because the rate can be lowered,” OECD Chief Economist Pier Carlo Padoan said in an interview. “We see no inflation risks coming up and we see the need to use monetary policy to support the economy.”

The euro area is the weakest among the world’s major economies, according to the OECD’s Interim Assessment published today. The combined economies of the bloc’s three Group of Seven nations will expand an annualized 0.4 percent in the first three months and 1 percent in the second quarter.

Growth of 2.3 percent and 2.6 percent in Germany will mask contractions of 1.6 percent and 1 percent in Italy. France will shrink 0.6 percent in the first quarter before expanding 0.5 percent in the second, the OECD said.

‘Moderate Growth’

That compares with annualized growth of 3.5 percent and 2 percent in the U.S., as well as 3.2 percent and 2.2 percent in Japan.

“The outlook for the first half of 2013 is for a return to moderate growth in the U.S. and an acceleration from low levels in Japan,” according to the report. “In Europe, meaningful recovery is likely to take somewhat longer.”

Expansions in the U.K. and Canada will be 0.5 percent and 1.4 percent and 1.1 percent and 1.9 percent in the two quarters, respectively, according to OECD estimates.

The divergence means that the U.S. Federal Reserve probably needs to cut back on monetary support in the near future, the OECD said. The Fed decided this month to press on with purchases of long-term debt known as quantitative easing that have ballooned the Fed’s balance sheet to a record $3.21 trillion.

Quantitative Easing

On March 20, Fed Chairman Ben S. Bernanke provided a clearer road map than ever before on what’s needed before the Fed trims its purchases, while avoiding any hint that a reduction in $85 billion in monthly bond buying is imminent. The central bank will adjust buying in a “sensitive way” based on several measures, including payrolls, wages and jobless claims, he said.

“Quantitative easing comes at a cost and the costs are well known,” Padoan said. “They are a misallocation of resources. We are beginning to see excess risk-taking coming up here and there, notably in corporate bond spreads.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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