The OECD renewed its support for European Central Bank interest rate rises today in a report on the euro zone economy.
The Paris think-tank said the level of interest rates remain below a neutral state, and that it was counting on another quarter-point rise in mid-2007 and a further one in early 2008 to bring the key ECB rate to 4%.
'The European Central Bank's (ECB) monetary policy has succeeded in anchoring inflation expectations around the price stability objective,' said the report.
While inflation peaked at 2.5% around mid-2006, about 1% point of that was the direct result of higher energy prices and the overall rate had since eased, it said.
The Paris think-tank said that higher energy costs are beginning to push up other prices as they work their way through the production chain.
'Although there are few signs yet of second-round effects on wages, various measures of core inflation and industrial producer prices are signalling potential inflationary pressures over the next year or two," it warned.
The OECD said that against this background, the level of interest rates remains below most estimates of the neutral rate, so monetary policy continues to stimulate economic activity in the euro zone.
The OECD also said that after several false starts an economic recovery has taken hold in the eurozone, and member states should use this to cut their budget deficits and make labour markets more flexible and competitive.
'The early years of monetary union have shown that less flexible economies can have a rough ride, missing out on the full benefits of the single currency', it said.
'Structural rigidities tend to reduce growth, make inflation more persistent and reduce the economy's ability to absorb shocks', the OECD warned.
The OECD said the priorities include: reducing labour market rigidities so that economies can cope with change more easily, to reduce job protection policies and to continue to integrate and develop financial markets.
