OECD wants lower rates to boost eurozone

The west's leading economic think tank yesterday called for a swift half-point cut in interest rates to revive the eurozone's faltering economy after slashing its growth forecast for the 12-nation zone this year.

In comparison to the "resilience" shown by the British economy to the difficult climate of the past few years, the Organisation for Economic Cooperation and Development said the eurozone had "undershot an already modest forecast by a wide margin".

The Paris think tank's economic outlook said the nations within monetary union would grow by 1% this year and 2.4% in 2004, compared to 1.8% and 2.7% respectively at the time it made its last predictions in the autumn.

While joining the long list of organisations casting doubt on Gordon Brown's Budget forecast of 3-3.5% in Britain next year, the OECD said the UK should grow 2.1% this year and 2.6% in 2004.

Jean-Philippe Cotis, the OECD's chief economist, said structural reform was the long-term cure for Europe's economic sluggishness, but urged the European Central Bank to kick-start recovery through cuts in borrowing costs.

The ECB held interest rates steady in April after cutting them by a quarter-point to 2.5% in March, and officials have argued that policy is already loose enough to stimulate growth, but Mr Cotis said: "There is a case for a significant easing in the eurozone, where growth may remain below potential during the next few quarters, while core inflation is decelerating," it said.

The think tank said its forecast of a "progressive but unspectacular recovery" in the world economy assumed that interest rates in the US had reached a trough of 1.25% and would start to rise by the end of this year, while rates in the eurozone would be "cut by half a percentage point over the coming months", and only start to rise in mid-2004. Mr Cortis said the swift end to the war in Iraq removed one of the possible barriers to faster growth.

Despite doubts over Mr Brown's forecasts, the OECD said Britain had shown greater resilience in weathering the downturn than any other major European economy. It predicted a slowdown in the growth of consumer spending this year, but warned of a less benign outcome in the event of a property crash. "A fall in the level of house prices, which in relation to average earnings are close to the peak reached in the late 1980s, could lead to a sharp retrenchment of consumers' expenditure."