OECD warns on eurozone rate rise

Jean-Claude Trichet has warned that rates will soon rise

Interest rates in the eurozone should not rise until growth improves, the Organisation for Economic Co-operation and Development (OECD) has said.

The OECD said any adjustment to rates across the 12-nation bloc should wait until the middle of next year, when its economies would have further recovered.

The European Central Bank (ECB) has hinted it will raise rates next month because of fears of growing inflation.

Eurozone growth could rise to 2.1% in 2006 from 1.4% in 2005, the OECD said.

'Vigorous growth'

Publishing its latest global economic analysis, the OECD said the world economy could continue to enjoy prolonged growth.

In the euro area, monetary tightening should wait until the recovery gathers enough momentum Jean-Philippe Cotis, OECD chief economist

However, it warned of a number of "substantial risks" to continued expansion including high oil prices, trade and fiscal imbalances.

The OECD said it expected growth in the struggling eurozone to pick up next year and warned against interest rate hikes before then.

ECB President Jean-Claude Trichet, who has kept interest rates on hold for the past five years, has said he expects them to rise soon.

"In the euro area, where underlying inflation has been steadily declining and economic slack remains entrenched, monetary tightening should wait until the recovery gathers enough momentum and becomes more resilient, which may take a few more quarters," said Jean-Philippe Cotis, the OECD's chief economist.

Vulnerabilities

At a global level, the OECD said that world economic growth had been "exceptionally vigorous", fuelled by Japan's economic recovery, low interest rates in Europe and stable inflation.

However, it warned that the global economy was vulnerable to a renewed surge in oil prices, abrupt exchange rate changes and worsening current account imbalances in the US and Asia.

"Looking to the future, enjoying strong and sustained world growth should not be taken for granted," Mr Cotis added.

"Efforts are needed to nurture this...through a more open trading system and continued economic reforms."