Eurozone told to turn on money presses or dice with deflation

The eurozone must follow the examples of the UK, US and Japan by turning to the printing presses to avoid the threat of damaging deflation, according to an assessment by a leading economic think-tank.

The latest outlook report from the Organisation for Economic Co-operation and Development (OECD) shows the UK registering the fastest improvement in prospects for this year and next, thanks to a broadening economic recovery and a push from the Government's Help to Buy housing initiative.

However, the OECD blamed a slowdown in emerging markets for dragging on the world's recovery as it trimmed its global growth estimates for next year from 4 per cent to 3.6 per cent.

It also provided a sobering assessment of the eurozone, which is expected to expand by just 1 per cent next year after contracting by 0.4 per cent in 2013. Eurozone unemployment is not expected to fall from record highs until 2015 at the earliest, while inflation in the 17-nation single-currency bloc – the UK's biggest trading partner – fell to its lowest level in nearly four years in October as the economy struggled to recover after emerging from its longest-ever recession between April and June. This prompted a shock cut in interest rates to 0.25 per cent by the European Central Bank (ECB) earlier this month.

Although the eurozone is still far from the outright deflation that has plagued Japan since the early 1990s, the OECD's chief economist, Pier Carlo Padoan, said the risks "may be slowly increasing".

He added: "The ECB must be very careful and be prepared to use even non-conventional measures to beat any risk of deflation becoming permanent."

The ECB is banned from buying bonds directly from governments under treaties, but it can buy them from banks on the secondary market. The central bank has run its own bond-purchasing programmes in the past but has always withdrawn an equivalent amount of money from markets – in effect, not printing new money – to ensure its interventions have no impact on the money supply, for fear of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 inflation.

Any move to outright quantitative easing is likely to be resisted by the inflation-averse Germany, which also opposed the recent rate cut.

The ECB injected more than €1trn (£861bn) into the banking system via ultra-cheap three-year loans in December 2011 and February 2012, under so-called long-term refinancing operations. "LTROs have already been used and could be used again, but maybe the ECB could think about forms of asset acquisitions," Mr Padoan said.

In the UK, the OECD forecasts that interest rates will rise in 2015 after a significant pick-up in economic growth to 2.4 per cent next year; the forecast in its June report was for growth of 1.5 per cent. However, the Paris-based think-tank also flagged the risk that the Chancellor's flagship Help to Buy scheme could fuel a house price bubble.

"Despite recent progress in reforming the planning system, it is urgent to continue to relax the barriers to housing supply to prevent overheating in the property markets," the report said.

The OECD warned: "Vigorous house price increases could boost wealth and private consumption, but could also undermine affordability and stretch the balance sheet of first-time buyers."

It forecast that interest rates will rise from the historic low of 0.5 per cent to 1 per cent in the last three months of 2015 as the economy normalises.

The Bank of England has raised the prospect that interest rates – and the mortgage payments of millions of homeowners – could rise in 2015 with its prediction that unemployment may well fall to 7 per cent, the threshold for considering interest rate rises under its "forward guidance" regime.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
ebooksA special investigation by Andy McSmith
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th century cartographer created the atlas
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot