OECD warns against hike in cost of borrowing until 2012 as deficits mount
Published 04/11/2010 | 05:00
INTEREST rates in Europe and the US should not be raised before 2012 as rich economies struggle with unprecedented budget deficits, the Organisation for Economic Co-operation and Development (OECD) said yesterday.
"Simply stabilising debt relative to gross domestic product in most countries will require a historical consolidation effort of anywhere from 6-9pc of GDP," OECD secretary general Angel Gurria said.
"But in fact even more is needed to bring debt back to sustainable levels," he said, launching a report published ahead of a summit of Group of 20 nations in Seoul later this month.
The report said average quarterly growth in OECD members should pick up from 1.75pc at present to 2.5pc in the latter half of next year, and 3pc in the second half of 2012. "The global economic recovery remains fragile but is broadly on track," the OECD said
Because of weak growth in the US and euro area -- and assuming inflation expectations remain low -- a return to normal interest rates should only proceed in earnest from the first half of 2012, the report says.
Even that should be at a pace that allows monetary policy to remain accommodating for economies. "If growth turns out to be weaker than projected, the normalisation of interest rates should be delayed further," the OECD says.
The report warns the leaders of the world's 20 leading economies about the dangers of printing money and competitive devaluations.
"Continued monetary ease in many advanced economies prompts capital flows to emerging economies, where they risk creating asset bubbles while putting upward pressure on their exchange rates," it says.
It says recent interventions by some governments in foreign exchange markets could prompt protectionist responses. "Better to reach a common understanding on how global imbalances are to be reduced," the report says.