The European Central Bank should cut interest rates further and commit to keeping them low for an extended period as the economy weakens and the risk of deflation grows, the Organization for Economic Cooperation and Development said.
“In the euro area, there is a need for easier monetary conditions given the prospects for weak economic activity and growing disinflationary pressures,” the Paris-based OECD said in a report published today. “Hence, the ECB should lower its refinancing rate by a further 25 basis points, possibly in conjunction with a negative deposit rate, and issue forward guidance on maintaining the accommodative policy stance for a long period.”
In case of severe turmoil, “liquidity provisions and broad-based purchases of assets should be expanded,” it said.
The Frankfurt-based ECB cut its benchmark interest rate to a record low of 0.75 percent in July and took the unprecedented step of reducing the rate it pays banks on overnight deposits to zero. ECB President Mario Draghi has been credited with easing the sovereign debt crisis after announcing the unlimited bond-buying plan known as OMT in September.
The OECD warned that the euro area could face further turmoil in the event that countries accessing the OMT scheme fail to comply with the conditions attached and a halt in ECB bond-buying is triggered.
“It remains to be clarified how the mechanism would operate if there was a failure to comply with conditionality, as interruption of support would spark financial instability in the sovereign debt market with possible contagion effects,” it said.