The US Federal Reserve should start raising interest rates in the next few months in the face of strong economic growth while the lagging euro zone should see rates cut by half a per cent, the OECD said today.
In its semi-annual report, the Paris-based think tank also said that Japan was likely to keep rates close to zero through the end of next year but that some policy tightening could become desirable if economic recovery is stronger than expected.
The OECD said that massive monetary policy easing across major regions over the past three years had limited the depth of the economic downturn and was still supporting recovery.
The improvement itself, however, was now consistent with a more neutral monetary stance.
To reach projections of 4.7 per cent real GDP growth this year and 3.7 per cent next year, the OECD said it assumed a Fed funds rate of 3.5 per cent by the end of 2005, compared with the current 1 per cent.
In contrast with its expectations for strong growth in the United States, the OECD said that there was an "unwelcome shift" in the balance of risks to the euro zone's growth outlook.
Combined with inflation expected to be around the European Central Bank's "below but close to 2 per cent" target, this meant there was a case for easing.
"The [OECD's] projected [euro zone] recovery is underpinned by a 50 basis point cut in the policy rate in the very near term, with the withdrawal of monetary stimulus starting in mid-2005, later and more gradually than in the United States," it said.