PARIS, Nov 18 (Reuters) - Quantitative easing by central banks is the only short-term stimulus measure still available to major developed economies, and its effectiveness is diminishing, OECD chief economist Pier Carlo Padoan said.
"Quantitative easing can work although we feel its impact will have (a) decreasing return going forward," he told Reuters in an interview coinciding with the release of the Paris-based organisation's twice-yearly economic outlook.
He said the U.S. Federal Reserve's recent plan to buy $600 billion dollars in government bonds was appropriate in the absence of inflationary risk, and recommended that Japan consider more extraordinary stimulus measures.
In its report, the Organisation for Economic Co-operation and Development said the Federal Reserve should hold off on raising interest rates until the recovery is firmly entrenched in the middle of 2012 -- later than the market consensus.
It also said European Central Bank should not raise interest rates before 2012, compared with market expectations for a hike in the final quarter of next year.
Padoan also told Reuters long-term yields could jump suddenly if the capacity ramp-up in major economies is misjudged.
The OECD's outlook flagged a sudden jump in long-term interest rates as one of the major risks to the outlook for major economies.
"Interest rates remain at a very, very low level even in the long term. They may remain like that for a long time but at some stage they may suddenly -- at a speed which is not foreseen -- start going up because suddenly the market sentiment changes," Padoan said in an interview.
"We have already seen that in the past in many occasions," he added. "We are not ruling out that possibility."
The OECD's outlook said it was difficult to reconcile current low levels of long-term interest rates with the outlook for a mild but sustained economic recovery, but Padoan said this did not necessarily mean markets were misjudging the situation.
"There is a risk (of a jump in bond yields), we are not saying that markets are wrong," he said.
A trigger to a sharp rise in interest rates could emerge if inflation pressures proved to be greater than currently thought because excess capacity in major economies turned out to be lower than thought.
"We do not see that yet, but at some stage we may find ourselves ... hitting the (inflation) ceiling and that would reverberate in interest rates going up because of that," Padoan said.
The OECD forecast in its Economic Outlook that world growth will shift down a gear next year as the United States rebounds less quickly than expected and growth in emerging countries moderate [ID:LDE6AF2FP].
The report also said that a sharp rise in government bond yields could directly harm economies by curtailing investment and indirectly by handing banks and other investors new losses as bond prices fell.
Bond prices move in the opposite direction to yields.
(Reporting by Leigh Thomas; Editing by John Stonestreet)