The Bank of Canada should resume raising interest rates this autumn to help cool the country’s hot housing market and allow the bank to reach its inflation target, the Paris-based OECD said on Tuesday in a report more hawkish than most market players.
“It is assumed here that the first policy rate increase will be implemented in autumn 2012, which is a few months ahead of current market expectations,” the Organization for Economic Cooperation and Development said in its global economic outlook.
Canada’s primary securities dealers don’t expect the central bank to tighten monetary policy until the first quarter of 2013, according to the average forecast in an April 17 Reuters poll that was done following a hawkish statement by the Bank of Canada.
The OECD said keeping rates low in Canada is appropriate for now but when risks to the economy recede, gradual increases in the policy rate will be required into 2013. It expects it will be some time before the bank returns to so-called neutral rates.
“House prices have risen substantially for several years and may have become overvalued in some markets,” the OECD said. “The government has taken steps to rein in mortgage lending, and a measured increase in monetary policy rates will reinforce these actions.”
In mid-2010, Canada’s central bank became the first in the G7 industrialized nations to begin lifting rates from emergency lows implemented during the global financial crisis. But since September 2010 it has held its key rate at 1%.
The organization forecasts economic growth in Canada of 2.2% this year and 2.6% in 2013, while the Bank of Canada forecasts growth of 2.4% in both years.
The OECD said the economy now appeared to be regaining momentum after a soft patch caused by temporary factors.