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OECD slashes its growth forecasts, urges ECB to act

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The ECB has been urged to pursue a policy of aggressive stimulus

The ECB has been urged to pursue a policy of aggressive stimulus

The ECB has been urged to pursue a policy of aggressive stimulus

The Organisation for Economic Co-operation and Development has slashed its growth forecasts for major developed economies, urging much more aggressive ECB stimulus to ward off the risk of deflation in a subdued euro zone.

The call adds to growing pressure on the euro zone, and the European Central Bank (ECB) in particular, to boost growth ahead of a meeting of finance ministers and central bankers from the Group of 20 economic powers later this week in Australia.

Updating its growth forecasts for major developed economies, the OECD projected growth in the euro zone at only 0.8pc this year and rising only slightly next year to 1.1pc. That marked a sizeable downgrade from its May Economic Outlook for the euro zone.

In that outlook, the Paris-based organisation forecasted growth of 1.2pc in 2014 and 1.7pc in 2015.

In comparison, the OECD saw the United States' economy growing 2.1pc this year before accelerating to 3.1pc in 2015. In May the OECD forecasted US growth of 2.6pc this year and 3.5pc next year.

The United States is set to push European countries at the G20 meeting to step up measures to boost demand and economic growth in the face of the risk of deflation, according to a senior official at the US Treasury.

OECD acting chief economist Rintaro Tamaki said financial markets had largely ignored mounting geopolitical risks to the global economy and the euro zone's worsening outlook.

"This highlights the possibility that risk is being mis-priced again and the attendant danger of sudden corrections in the financial markets," Mr Tamaki told journalists.

The OECD said that although euro zone inflation, at a five-year low in August of 0.4pc, should strengthen as demand recovers, low levels close to zero raised the risk of deflation.

Citing the example of Japan in the 1990s, Mr Tamaki warned that financial market inflation expectations, closely watched by the ECB, were a poor judge of future inflation trends when it sets monetary policy. "Recent ECB action is welcome but further measures, including QE (quantitative easing), are warranted," Mr Tamaki said.

"The perception that policy action is always too little too late needs to be changed."

The ECB recently cut the cost of borrowing to near zero and pledged to buy repackaged debt in an effort to encourage lending to credit-starved companies.

However, so far it has shied away from the kind of quantitative easing carried out by counterparts in the United States and Japan, consisting of a huge campaign of buying government and other bonds. cost of borrowing.

Irish Independent