OECD says Fed should start hiking rates, ECB pause

The Federal Reserve should begin raising U.S. interest rates and the European Central Bank should pause its monetary tightening cycle, the OECD said on Wednesday.

With Europe deeper into a fiscal tightening phase than the United States, the OECD said in a report there was a better case for the Fed to hike rates than the ECB.

With some signs that long-term inflation expectations have edged up, there is a strong case for an initial and visibly positive rise in the policy rate from mid-2011 in the United states, the Organization for Economic Co-operation and Development said.

If the recovery keeps up pace and slack in the U.S. economy disappears, the OECD said it expected the Fed to follow up with rate increases amounting to one percentage point over the course of 2011. It forecast that the Fed funds target rate could be at 2.25 percent by the end of 2012.

The OECD said that the ECB did not need to make further interest rate hikes in the immediate future after it lifted its refinancing rate to 1.25 percent last month in the first hike by a major central bank since the crisis.

But it said that tightening should resume by next year and that it expected the ECB's interest rates to reach 2.25 percent by the end of 2012.

In Britain, the OECD said that earlier hiking was warranted because inflation has been well over the Bank of England's target rate of 2 percent.

It forecast the Bank of England's interest rates would be raised to 1 percent by the end of 2011 and then be lifted to 2.25 percent by the end of 2012.

Turning to Japan, the OECD said that the central bank should keep its zero-interest rate policy in place until inflation is positive.

In the absence of signs of a clear trend toward achieving the 1 percent implicit inflation target, the Bank of Japan should stand ready to undertake further measures, focusing on reducing long-term interest rates through expanded purchases of government bonds, the OECD said.

Emerging giant China also needs to stay focused on taming inflation and raise interest rates by another 50 basis points even though its economy is slowing, the OECD said.

It said China needs to do more to calm price pressures because a weaker yuan has negated some of the impact of previous increases in interest rates and the reserve requirement ratio.(Reporting by Leigh Thomas; Editing by Toby Chopra)