* ECB should consider buying euro zone assets, OECD says
* Euro zone inflation to be well below ECB target in 2014/15
* Euro zone economy to grow just 1 percent next year
By Robin Emmott
BRUSSELS, Nov 19 The European Central Bank must
consider buying government and corporate bonds to help the euro
zone avoid a Japanese-style deflationary spiral, the OECD said
It was a direct call for the ECB to undertake quantitative
easing (QE), a policy that currently divides the bank, in the
face of what the think-tank said was a risk of deflation.
Inflation in the 17-nation euro zone fell to its lowest in
nearly four years in October, with the economy struggling to
recover strongly after emerging from its longest ever recession.
Despite a surprise ECB rate cut this month, the Organisation
for Economic Co-operation and Development said in its latest
economic outlook that the bank needs to take bolder measures at
a time of massive unemployment and difficult credit.
"Risks of deflation may be slowly increasing," OECD chief
economist Pier Carlo Padoan told Reuters. "The ECB must be very
careful and be prepared to use even non-conventional measures to
beat any risk of deflation becoming permanent," he said.
Under its statutes, the ECB is banned from buying bonds
directly from governments but can find ways to purchase them
from banks, for example, on the secondary market or accept them
as security in return for finance.
The euro zone is still far from the deflation that Japan
suffered from the early 1990s, when falling prices weakened
demand, leading to wage cuts and even lower prices.
But Ireland, Cyprus and Greece all registered deflation in
October and for the euro zone as a whole, consumer prices
actually fell in October from September, by 0.1 percent.
The OECD's call follows comments by ECB Executive Board
Member Peter Praet in an interview this month that asset
purchases were one of the tools available to the central bank
beyond interest rate cuts.
The comments signalled that the ECB, having cut rates so low
and provided liquidity to banks, may be considering the
controversial move of asset purchases because it has few other
options, although it is not clear if that would emulate the
U.S.-style quantitative easing programme.
The ECB injected more than 1 trillion euros (861 billion
pounds) into the banking system via ultra-cheap three-year loans
in December 2011 and February 2012, known as LTROs.
"LTROs have already been used and could be used again,"
Padoan said. "But maybe the ECB could think about forms of asset
acquisitions." Asked if that meant corporate bonds, Padoan said:
"That could be one possibility."
The ECB has run its own bond purchases programmes in the
past but has always withdrawn an equivalent amount of money from
markets - in effect not printing new money - to ensure its
interventions have no impact on the money supply for fear of
pushing up the rate of inflation.
With inflation at 0.7 percent in October and well below the
ECB's target of just below 2 percent, that argument has been
The OECD painted a sobering picture in its outlook for the
euro zone as the bloc tries to recover from the public debt and
banking crises that nearly shattered the currency area.
Economic output is set to grow just 1 percent next year
after contracting 0.4 percent in 2013, while the unemployment
rate will not fall until 2015, the OECD said, putting its
forecasts largely in line with the European Commission.
However, the OECD sees annual inflation at 1.2 percent in
2014 and 2015, below the Commission's latest forecasts of 1.4
percent and 1.5 percent respectively.