PARIS, May 23: The US economy is set to grow by a robust 3.6 per cent in 2006, but the Federal Reserve should increase interest rates, the OECD said Tuesday while warning strongly about high deficits, deep trade imbalances and low savings.

The American economy weathered Hurricane Katrina and has absorbed oil price shocks but is now at risk of overheating, the Paris-based Organisation for Economic Cooperation and Development signalled in its twice-yearly review of the world economy.

Monetary policy, currently near neutral, needs to tighten slightly to keep the economy in balance, the OECD said.

The report described current account imbalances in the US — which the OECD predicted could reach 7.5 per cent of GDP in 2007 — as “unsustainable”, adding that most observers agree that ... a rebalancing looks increasingly unavoidable.

Such a correction could entail a further depreciation of the already weakened dollar, possibly to the extent of one third to one half, the report said, citing estimates by non-OECD experts.

Short-term interest rate for 2006 would settle at 5.1, remaining steady in 2007, the OECD forecast. The current fed funds rate is 5.0 after three quarter-point increases this year, and eight quarter point increases in 2005.

The projection for the US economy’s real GDP growth in 2006 was 3.6 per cent, up from its forecast six months ago of 3.5 per cent. Growth in 2007 should taper off to 3.1 per cent, the report says.

The OECD forecasts were based on oil prices stabilizing around 70 dollars per barrel. Light sweet crude for July delivery closed at 69.96 dollars per barrel in the United States on Monday.

The OECD said of the US economy that “profitability is high, business confidence is strong and job creation robust”, adding that unemployment had come down to near structural levels.

But it also noted that real growth had lagged behind productivity.

The “vast majority of wage earners,” the report said, have seen their purchasing power actually decline, with most gains in wealth coming from the housing and stock market.

Despite a substantial boost from soaring energy prices inflation has remained flat in the US, but the OECD cautioned against the possibility of “imported inflation”.—AFP