June 4 (Bloomberg) -- The Organization for Economic Cooperation and Development cut its forecast for global growth as the U.S. slowdown spreads, while cautioning central banks against reducing interest rates amid accelerating inflation.

Economic expansion in the OECD's 30 members will slow to 1.8 percent this year and 1.7 percent in 2009, the Paris-based group said today in its semi-annual outlook. The projection signals the weakest expansion since 2002 and reverses the previous prediction that world economic growth would accelerate to 2.4 percent next year from 2.3 percent.

``The OECD economies have been through a near perfect storm,'' Jorgen Elmeskov, the OECD's acting chief economist, told reporters in Paris.

Surging food costs and a doubling in the price of oil in a year limit the ability of the U.S. Federal Reserve and its counterparts to cushion growth, the OECD said in predicting the strongest worldwide inflation this year since 2001. It recommended the major central banks leave their benchmark interest rates unchanged for the rest of 2008.

The Fed should hold its key rate at 2 percent until recovery takes hold in the middle of 2009, and then raise it to 4 percent by the end of that year, the OECD said. The European Central Bank should keep its rate at 4 percent, while the Bank of Japan should protect its nascent expansion by maintaining its rate at 0.5 percent for another year, it said.

`Potent Threat'

``The scope for policy support to decelerating activity depends on inflation developments,'' the OECD said, forecasting global inflation of 3 percent this year. ``A ratcheting up of inflation expectations remains a potent threat.''

The U.S. is leading the international slowdown as the fallout from the housing recession and tighter credit reverberate at the same time as inflation saps purchasing power and raises production costs.

The OECD cut its projection for growth in the world's largest economy this year to 1.2 percent from 2 percent and halved its forecast for next year to 1.1 percent. The Fed's current monetary policy ``should be maintained until the recovery takes hold, with the policy easing being reversed promptly once financial headwinds abate,'' it said.

Strongest Economy

The 15-nation euro area will grow 1.7 percent and 1.4 percent this year and next, respectively, below the 1.9 percent and 2 percent anticipated in the last forecast in December, the OECD said. Within the continent, divergences will widen as Germany and France stick close to their trend growth rates and Spain and Italy fall well below theirs, it said. Germany will prove the strongest economy among the Group of Seven nations, growing 1.9 percent this year, faster than previously forecast, with Italy the weakest, expanding 0.5 percent, the OECD said.

The ECB should ``stand ready to react'' either if the financial turmoil or housing slumps hurt growth or if rising commodity prices boost broader inflation, it said.

While raising its forecast for growth this year in Japan to 1.7 percent from 1.6 percent and signaling it will dodge a recession, the OECD cut its outlook for next year to 1.5 percent from 1.8 percent. The Bank of Japan should resist reacting to the stronger growth this year by raising interest rates and instead wait for a ``permanent exit from deflation.''

In contrast, the OECD said the economies of the U.K. and Canada face ``sharper falls in output'' than most other countries and if that occurs their central banks should cut interest rates by another 75 basis points.

Property Prices

Declining property prices will weigh on the U.K. economy, limiting its expansion to 1.8 percent in 2008 and 1.4 percent in 2009. Inflation may still delay the Bank of England cutting its key rate from 5 percent, it said.

The Canadian economy, which unexpectedly shrank in the first quarter, will grow 1.2 percent this year before accelerating to 2 percent next year.

While China is not a member of the OECD, it said its economy will slow to 10 percent this year and 9.5 percent in 2009 as exports decline. Authorities should ``continue working to reduce overheating pressures'' as inflation holds above 5 percent this year and next, it recommended.

The OECD said that although financial turmoil had ``passed its worst,'' its effect would ``brake growth for a considerable time.'' Housing markets are deteriorating at a ``gathering pace'' with prices in the U.S. continuing to fall and those in Ireland, Denmark, Spain and the U.K. also vulnerable, it said.

The organization also warned that globalization may be becoming more of an inflationary force as emerging markets such as China raise the price of their exports and their demand raises the cost of commodities internationally. ``Disinflation from globalization is diminishing,'' the report said.

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net

Last Updated: June 4, 2008 06:59 EDT