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OECD: interesting report !

REUTERS -Jan 14 - The OECD renewed forecasts of euro zone recession in a report on Wednesday that recommended further ECB interest rate cuts and the creation of a pan-European body to better supervise the financial sector.

The Organisation for Economic Cooperation and Development said economic growth would likely remain lacklustre until the middle of 2010 in the common currency area comprising 16 countries since Slovakia joined the club on Jan. 1.

The growth and inflation forecasts were unchanged from those the Paris-based think tank published in November and its advice to the European Central Bank was unchanged too -- cut rates in the months ahead if things go as badly as expected.

OECD economist Nigel Pain, one of the report's main authors, said that while the forecasts were the same as a few months ago the "downside risks" of a more negative outcome were mounting.

"There's certainly more scope for monetary easing", Pain told Reuters in a telephone interview, referring to the ECB, which is holding a rate-policy meeting on Thursday.

Fifty-five of 70 economists polled by Reuters between Dec. 30 and Jan. 6 said the ECB would cut rates from their current 2.50 percent at the Jan. 15 meeting.

Call For Pan-European Supervisor

The OECD suggested it was time to cast national rivalries aside to set up a pan-European supervisory body to help better control a financial industry that increasingly operates across borders.

That idea has been floated before, and rejected by the likes of Germany and by Britain, Europe's largest financial centre.

But London and Berlin may find it increasingly hard to maintain this stance since they are seeking urgent, internationally coordinated steps to improve the safety of a financial system driven to the brink by unchecked excess.

"The financial crisis is really acting as an engine to force countries to act together in a way they didn't before," Pain said.

The OECD report said it made sense now to move towards "a more centralised and integrated approach to supervision of the financial sector".

"Possible options might include the establishment of a single EU financial supervisor or a European system of supervisors, with a central agency working in tandem with national supervisors," the OECD report said.

Either option could improve control of systemic risks in an  increasingly integrated European financial market, the OECD said, acknowledging that the second, looser option, might be easier to achieve.

"In principle it should be possible to balance the interests of both home and host countries. However, if such a system was unable to overcome national biases and the externalities that arise from them, a single supervisor should be considered."

ECB chief Jean-Claude Trichet said last week the ECB was studying the possibility of it playing some  role in this domain.

The ECB's catchment area however is the euro area and does not cover big banking centres such as Britain or Switzerland.

ECB Can cut rates further

Chief among the OECD's forecasts was a prediction that gross domestic product would shrink 0.6 percent in 2009 overall, after 1 percent growth in 2008, which while positive pales beside the 2.6 percent growth rate of 2007 and does not reflect the abrupt slowdown as 2008 progressed.

After contracting in the second and third quarters of 2008 -- the last for which official readouts are available -- GDP likely contracted again in the fourth quarter and would likely do so in the first half of this year, the OECD said, meaning a negative result for the year as a whole, it said.

Growth would remain "below trend" until the latter half of 2010, the OECD said.

The report sees inflation, according to the HICP measure watched by the ECB, tumbling to a rate of 1.4 percent in 2009 from a rate of 3.4 percent in 2008.

"The (ECB) policy (interest) rate has been reduced sharply already as downside risks to activity have emerged and inflationary risks have receded, and there could well be scope for further monetary easing in the coming months as economic slack develops," the report said.

For a summary of the report see :

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