* OECD urges central banks to stay relaxed in wake of Katrina
* US and Japan seen as better placed economically than UK or eurozone
The Organisation for Economic Co-operation and Development yesterday urged central banks to adopt a relaxed attitude to interest rates in the wake of surging oil prices and Hurricane Katrina.
Describing the $20-a-barrel rise in oil prices since May as a major economic shock, Jean-Philippe Cotis, OECD chief economist said the ability of economies to shake off its effects would depend on their underlying momentum.
The US and Japan were much better placed than the eurozone or the UK, he added.
Mr Cotis pointed to an "incontestable slowdown" in the UK economy and reduced the OECD's growth forecast from 2.4 per cent in 2005 to 1.9 per cent. He gave a nod in the direction of further interest rate cuts, contradicting the views of Mervyn King, Bank of England governor.
He said: "As long as inflation expectations remain well-anchored, higher oil prices also seem to call for lower interest rates than would otherwise have been the case."
Economic figures yesterday gave little encouragement that an end to the UK slowdown was imminent. Industrial production in the three months to July was unchanged over the previous three months and 1.7 per cent lower than a year earlier.
With manufacturing output continuing its slow recovery from a trough in March, the National Institute for Economic and Social Research estimated that economic growth in the quarter ending in August was 0.5 per cent. This remained a little below the long-run UK average.
Today, a similarly weak message comes from the service sector as the CBI and Grant Thornton release their quarterly survey of service companies. Companies are, on balance, pessimistic about the outlook for the second quarter in a row although a majority of business and professional service companies still expect output to grow.
The OECD said the US or global economic effects of Katrina could not yet be gauged with "any confidence". Mr Cotis quoted independent economists who tend to estimate it will have a temporary effect, reducing US economic output by 0.25-0.5 per cent in the second half of 2005.
Taking to heart its role of advising rich country policy-makers, the OECD delivered recommendations - some of which will not be gratefully received - to the four most important central banks.
Mr Cotis thought the underlying strength of the US economy left it well-placed but the rise in oil prices without any corresponding pick-up in core inflation meant monetary policy tightening could be slowed. "The Federal Reserve should continue to move back towards neutrality, although possibly at a more measured pace than hitherto."
The OECD, worried that the Bank of Japan might move away from its zero interest rates, warned it should maintain its extremely easy monetary policy for "as long as underlying inflation is not durably positive".
The European Central Bank was outraged by the OECD's suggestion in May that it should cut interest rates. Yesterday, Mr Cotis stuck to this view without directly calling for a cut. Responding to a question about the possibility of rises in European interest rates he said: "No tightening, that's the minimum."
