Leave interest rates where they are, OECD says

The world's leading central banks should keep interest rates at their current levels as they try to balance strong inflation with weak expansion, the Organization for Economic Cooperation and Development said.The US Federal Reserve's decision to leave its benchmark rate at 2% was vindicated by the credit squeeze and likelihood slowing economic growth will restrain inflation, the Paris-based group said today. The European Central Bank should keep its key rate at 4.25% to curb underlying price pressures, while the Bank of Japan is advised to maintain its main rate at 0.5% as a buffer against deflation.The report, which did not seek to revise the OECD's June forecast of 1.8% global growth this year, projected ``weak activity through the end of the year'' as financial- market turmoil, downturns in major housing markets and high commodity prices ``continue to bear down on global growth.''Projections for the major economies based on the organization's statistical model maintained June's forecast for growth of 1.4% in the Group of Seven. It anticipated growth of 1.8% in the US this year, stronger than the 1.2% forecast in June, and 1.2% in the 15-nation euro area, down from 1.7%. The projection for Japan was trimmed to 1.3% from 1.7%, according to the model.``The picture of the major economies is one of a pretty weak second half,'' the OECD's acting chief economist Jorgen Elmeskov told reporters in Paris today.UK slumpThe OECD said tax cuts in the US and ongoing financial turmoil meant it was difficult to predict the outlook for the world's largest economy, with growth in the final two quarters of this year balanced between expansion and contraction.The model's central projections suggested the UK economy may now be entering a recession with growth expected to shrink in the current and subsequent quarter on an annualized basis. It cut its 2008 growth forecast for Europe's second-largest economy to 1.2% from 1.8%.The organization was less certain about the outlook for the euro-area, Japan and Canada. It projected each will avoid recession, although the range of forecasts given by the model suggests it remains a possibility for all three.Financial `disruption'With banks having acknowledged most of their losses related to the collapse of the US subprime mortgage market, financial markets are now at risk from ``signs of weakness'' in economies, the OECD said. ``The eventual depth and extent of financial disruption is still uncertain, however, with potential further losses on housing and construction finance being one source of concern,'' it said.The housing slump continues to play out in many economies with reduced credit supply adding to pressure on prices, the OECD said. US home prices continue to fall, threatening another round of defaults and foreclosures that may hurt the market anew, while in Europe signs are emerging that housing troubles are spreading beyond economies such as Spain and the UK, it said.While the price of oil has fallen from a record, fuel supply remains tight and prices of other commodities such as food have ``steadied at high levels,'' the report said. ``If commodity prices are sustained at their recent, and in cases such as oil, lower levels, some moderation of both headline and underlying inflation is to be expected,'' it said.