The Bank of England is not expected to change interest rates when its meeting ends this morning, but the vote is expected to be a close one. The OECD's report, published midway through the two-day meeting of the Monetary Policy Committee, notes that falling unemployment has driven earnings growth to a rate "barely consistent" with the inflation target.
However, it says monetary policy is already very tight and concludes that inflation will stay close to target. It also says that the Government's fiscal policy is moderately contractionary.
The organisation has therefore lopped its forecast for growth this year to 1.7 per cent, from the 2.2 per cent it predicted in December. It foresees unemployment starting to rise before the end of the year and through 1999, and says interest rates could begin to fall before the end of this year and reach 5.5 per cent by the end of next year.
This helped knock nearly three pfennigs off the pound yesterday. It ended below DM3.04, the sterling index falling 0.6 to 107.4.
While somewhat more pessimistic about UK prospects, the OECD has become very gloomy about Japan and Korea. It still expects little spillover from Asia to other OECD economies, but has slashed its forecasts for growth in Japan and Korea.
"Japan's economy is on the edge of recession," the report says. "The challenge facing policy-makers is enormous." Since November 1996 it has cut its forecast for growth in Japan this year by 4.5 percentage points to -0.3 per cent. The OECD urges tax cuts, a clearer reform programme and a comprehensive strategy to boost consumer and investor confidence.
The revisions to the outlook for Asia translate into a downgrade of 0.5 per cent, taking the forecast growth for the entire OECD this year to 2.4 per cent. But the Paris-based economists remain upbeat about prospects for the US and Continental Europe, with little change to their predictions.
"In most OECD countries outside Asia, the underlying economic situation is generally more positive than expected earlier," the report comments. It says the swift policy response, and consequent reductions in long-term interest rates, have cushioned most of its members from any Asian spillover.
The biggest impact will be on trade figures, with a sharp slowdown in world trade growth and a swing of $70bn (pounds 42bn) in 1998 and 1999 in the trade balance between the crisis countries and the rest.
The US economy is nevertheless likely to glide into a soft landing, although there are few signs of slowdown yet. "Policy-makers should be watchful for any possible resurgence of inflationary pressure. Monetary policy may at some point need to lean towards tightness once again," it cautions. However, it forecasts no change in US interest rates in the foreseeable future.
As for the likely members of the euro, the organisation says the economic recovery is becoming more broadly based. They have achieved enough convergence for the single currency to start smoothly, but must not rest on their laurels as far as keeping government budgets under control is concerned.
The report also emphasises the importance of structural reforms to the jobs market, competition policy and the financial sector - precisely the economic agenda Britain has been promoting during its EU presidency.
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