OECD Calls for ECB Taper, Cuts U.S. Growth Forecasts

By Paul Hannon Features Dow Jones Newswires

The European Central Bank should wind down its bond purchases in 2018 and raise one of its key interest rates by the end of that year, the Organization for Economic Cooperation and Development said Wednesday.

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The Paris-based research body also cut its economic growth forecasts for the U.S. this year and next, saying stimulative measures it had expected from the Trump administration would now likely be implemented later than it had previously anticipated.

The OECD's call comes as ECB policy makers prepare to meet in Tallinn, Estonia, and marks a change in its stance since March, when it said policy makers should continue with current policies.

With the eurozone's economic recovery set to pick up, and inflation higher than it has been in recent years, ECB policy makers have come under increasing pressure from Germany and elsewhere to wind down the stimulus measures they have launched since 2014.

Those measures include purchases of government bonds that run at EUR60 billion a month, and a negative deposit rate, which means banks pay to hold funds at the central bank.

"With core inflation projected to slowly approach the inflation target by end-2018, the European Central Bank should gradually taper asset purchases in 2018," the OECD said. "Inflation developments also warrant a gradual phasing out of the negative interest rate policy; in particular, the negative deposit rate could be raised toward the end of 2018 to make the policy rate corridor symmetric again."

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ECB officials will meet Wednesday and Thursday to consider their next moves. Mario Draghi, the bank's president, is expected to express greater confidence in the economy after the meeting. He could announce a review into different exit strategies, but he is unlikely to directly address the timing of any future moves.

Central bankers face a tricky task in signaling an impending removal of stimulus policies. When the U.S. Federal Reserve signaled an end to asset purchases in 2013, it sparked the "taper tantrum", roiling stock and bond markets.

Mr. Draghi doesn't always welcome advice from international institutions such as the OECD. Back in early 2014, when the International Monetary Fund was pressing for new stimulus measures, he responded with irritation to a call made a day ahead of an ECB policy meeting, suggesting it would not act similarly ahead of a Fed gathering.

"It is a path toward normalization and is consistent with what the ECB has been saying," said Catherine L. Mann, the OECD's chief economist, of its new advice. "Maybe it hasn't been as explicit."

The OECD's call came as part of its twice yearly report on the outlook for the global economy, in which it raised its growth forecasts for the eurozone both this year and next. By contrast, it lowered its forecast for the U.S. economy, and now expects growth this year of 2.1%, down from 2.4% in March. It also lowered its projection for 2018 to 2.4% from 2.8%, reflecting a later start for investment programs and tax changes it had expected from the new administration.

"There's a realization that potential aspects of the program we thought would be in place by now have been pushed off to the end of the year, at best," Ms. Mann told The Wall Street Journal.

The Paris-based research body also raised its growth forecasts for Japan and China for this year and next, and its forecast for global economic growth this year, to 3.5% from 3.3% in March. But it said investment spending would likely be too subdued to quickly raise productivity, a factor keeping wage rises limited despite falling unemployment rates.

"In sum, the global economic outlook is better, but not good enough to sustainably improve citizens' well-being," said Ms. Mann.

While the near-term outlook for growth has improved, the OECD believes financial markets are anticipating even better outcomes than are likely, raising the risk of a "snap back" in asset prices that could in turn hinder the global economy.

"We do think that the financial markets continue to be disconnected from the state of the real economy," Ms. Mann said.

The OECD also highlighted growing risks in housing markets, where prices in some countries have risen to levels that have in the past preceded busts.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 07, 2017 04:44 ET (08:44 GMT)