ECB needs to come to euro zone's rescue again - OECD

The European Central Bank, which shored up the euro zone last year, needs to act again to lift the bloc out of recession, the OECD said on Wednesday, calling for bold steps beyond just interest rate cuts.

The 17-nation euro zone is suffering its longest economic downturn since its creation in 1999, weakened by public debt and banking crises that have nearly shattered the currency area.

Still waiting for a recovery almost a year after the ECB offered to do "whatever it takes" to save the bloc, the Organisation for Economic Co-operation and Development said in a report that the bank must consider new ways to help, including a U.S.-style quantitative easing program.

"Europe is in a dire situation," OECD chief economist Pier Carlo Padoan told Reuters. "We think that the euro zone could consider more aggressive options. We could call it a euro zone-style QE," he said, referring to the policy of printing money for asset purchases to revive growth.

The OECD's call echoes that from a top U.S. Federal Reserve official earlier this month and adds to expectations the ECB will consider "non-standard monetary policy measures".

The ECB has run its own bond purchases programs in the past but has always withdrawn an equivalent amount of money from markets - in effect not printing new money - to ensure its interventions have no impact on the money supply for fear of pushing up the rate of inflation.

But euro zone inflation is well below the ECB's 2 percent target level at 1.2 percent in April, and indebted Greece is already seeing deflation, along with non-euro country Latvia which is due to become the bloc's 18th member next year.

The OECD did not go into details about whether the ECB should emulate the Fed, which is buying $85 billion worth of bonds every month, but the Paris-based body warned that a failure to move and strengthen banks was a "major risk".

Predicting an economic contraction of 0.6 percent in the euro zone's economic output this year, the OECD said the ECB should also consider cutting its deposit rate below zero because interest rates are already at a record low.

That would mean charging commercial banks for holding their money overnight, encouraging banks to lend out money to businesses and households rather than hold it at the ECB.

Such a move might help counter the lack of bank lending in southern Europe, where companies and consumers are often seen as too risky and banks prefer to keep their money in Frankfurt.

PESSIMISM

In its report, the OECD's economic forecasts were generally more pessimistic than those of the European Commission and euro zone governments, forecasting that France, Europe's second largest economy, would contract 0.3 percent this year. That compares to the EU executive's -0.1 percent estimate.

The OECD is also more downbeat about Greece's growth prospects than the country's international lenders. The OECD says the Greek economy will contract for a seventh consecutive year in 2014, by 1.2 percent, compared with the Commission's forecast of 0.6 percent growth.

That has implications for Athens' ability to return to market, as a weaker-than-expected economy might require more emergency loans from the euro zone and the International Monetary Fund, the OECD said.

Portugal could also shrink 2.7 percent this year, greater than the government's -2.3 percent forecast and a worsening compared to the OECD's previous estimate of a 1.8 percent drop in gross domestic product, although the OECD still expects a 0.2 percent recovery next year.

The OECD also cut its forecasts for Italy from projections made less than a month ago, saying the economy would contract by 1.8 percent this year. The recession that has already lasted for seven straight quarters will extend to the end of the year before growth edges up by 0.4 percent in 2014, it said.

(Additional reporting by Leigh Thomas in Paris, Gavin Jones in Rome, Andrei Khalip in Lisbon and Harry Papachristou in Athens Editing by Jeremy Gaunt.)