OECD tells banks to relax over rates

The Organisation for Economic Co-operation and Development on Tuesday urged the world's central banks to adopt a relaxed attitude to interest rates in the wake of surging oil prices and Hurricane Katrina.

Describing the $20-a-barrel rise in oil prices since May as a big economic shock, Jean-Philippe Cotis, the OECD's chief economist, said the ability of economies to shake off its effects would depend on their underlying momentum. The US and Japan were better placed than the eurozone or the UK, he said.

The OECD said the economic effects of Katrina “cannot yet be gauged with any confidence”, although Mr Cotis quoted independent economists who are tending to estimate that it will have a temporary effect, reducing US economic output by 0.25-0.5 per cent in the second half of 2005.

The OECD delivered recommendations to each of the four most important central banks, some of which will not be received gratefully.

Mr Cotis said he thought the underlying strength of the US economy left it well placed but the rise in oil prices without any corresponding pick-up in core inflation meant monetary policy tightening could be slowed.

“The Federal Reserve should continue to move back towards neutrality, although possibly at a more measured pace thanhitherto,” Mr Cotis said.

Worried that the Bank of Japan might move away from its zero interest rates, the OECD warned that it should maintain its extremely easy monetary policy for “as long as underlying inflation is not durably positive”.

He also advised the Bank of England to set lower interest rates than would have been the case before the oil price rises.

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