Major central banks with interest rates close to zero must keep them there for a substantial period of time and the European Central Bank, must act soon to lower rates further, the OECD said this morning.
The Organisation for Economic Cooperation and Development said in its latest economic outlook that the US Federal Reserve should not raise interest rates before 2011.
The Bank of Japan should probably keep rates at 0.1 per cent beyond the end of 2010, the report said.
"The bleak growth outlook argues for using additional room, where it still exists, for interest rates cuts and warrants keeping exceptionally low policy rates for a substantial period of time," the OECD said.
"It is also important for central banks to communicate this explicitly so as to affect interest rates at longer maturities."
The OECD said the ECB, which has cut its principal rate to 1 per cent, should exhaust "remaining scope for cutting the rate on the main refinancing operations sooner rather than later."
The Bank of England and the Bank of Canada should also keep the rate as close to zero as possible up to the end of 2010, it said.
The OECD said that concerns of potential inflationary impacts of central bank intervention was overblown. Nevertheless, unconventional measures introduced by central banks in response to the crisis would eventually need to be withdrawn.
"They need to be gradually scaled back as conditions in financial markets normalise, arguably even before central banks start raising policy rates," it said.
Governments would also need to send a message to financial markets that a trend of soaring debt and deficits would eventually be reversed.
"New tremors in the financial area cannot be excluded...and adverse bond market reactions to the sharp increase in government indebtedness also represent a downside risk," the report said.
The recent rise in bond market yields was not a problem but any further rise would raise concerns, the OECD said.
"What we are worried about would be further rises in the bond yields which could risk the recovery," OECD chief economist Jorgen Elmeskov said.
"I think it is certainly a time to start thinking about exits and to make announcements, even conditional ones as regards exit from fiscal stimulus."
Mr Elmeskov said currencies were no longer a point of concern on the economic horizon.
"Exchange rates have been the dogs that didn't bark during this crisis," he said.
"We had a world financial crisis and there were limited effects on exchange rates, except for the appreciation of the Japanese yen."
Reuters