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Thu, Dec 01, 2005 - Page 12 News List

Eurozone poised on verge of continued growth, OECD says

AFP , PARIS

The eurozone is heading for economic growth of 1.4 percent this year, the Organization for Economic Cooperation and Development (OECD) said on Tuesday, while warning the European Central Bank against raising interest rates.

The OECD said that although the eurozone economy was poised to grow further, the ECB should hold off on raising the cost of borrowing until the autumn of next year, contradicting central bank chief Jean-Claude Trichet, who has sent clear signals that the bank could announce a rate hike today.

Figures given by the OECD in its six-month report pointed to growth this year that is actually less than the 1.8 percent increase last year, but indicated that economic activity should pick up next year with growth of 2.1 percent.

The body was more upbeat about the eurozone's growth prospects than in its last report in July about the bloc, when it forecast growth would be 1.25 percent this year and 2.0 percent next year.

The forecasts were slightly more optimistic than those from the European Commission which earlier this month predicted growth this year of 1.3 percent and 1.9 percent next year.

But just two days ahead of a meeting at which the ECB is widely expected to lift interest rates, the OECD said that recovery was not yet solid enough to increase the cost of borrowing and that inflation was set to fall next year.

"With the recovery expected to be moderate and any oil-price induced second round effects on wage inflation being uncertain, monetary policy should remain on hold for some more time, with tightening starting in earnest later next year," the OECD said in its biannual economic outlook

"It is assumed that its [the ECB's] key policy rate is raised from the autumn of 2006 onward," the OECD said.

The ECB has come under fire from many politicians and private economists for signalling that it is to start cranking up eurozone interest rates today, which they say will nip the recovery in the bud.

However, the Frankfurt-based central bank is eager to keep soaring oil prices from pushing up other prices and especially wages, despite little evidence so far of the dreaded "second-round effects" of energy costs.

It is keen to see inflation ease down from a recent peak in September of 2.6 percent, which was well over the ECB's preferred rate of close to but less than two percent.

The guardian of the euro has held its central "refi" refinancing rate steady at 2.0 percent since June 2003. And the last time the ECB tightened monetary conditions in the single currency area was in October 2000.

The OECD saw little need for a rate increase now to tackle inflation threats because it estimated inflation would ease next year to less than 2.0 percent "when the impact of the oil price hike wanes".

The Paris-based organization said a rate increase "would be warranted only if the oil price shock spills over into ongoing wage and core price inflation in a serious way."

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