Bank of Canada should raise rates in late 2013: IMF

Wed Dec 19, 2012 2:40pm EST
 

By Claire Sibonney

TORONTO (Reuters) - Canada's economy should start ramping up in the second half of next year following a couple years of sluggish growth, allowing the Bank of Canada to resume raising interest rates by the end of 2013, the International Monetary Fund said on Wednesday.

In a report that warned about the threat to the Canadian economy from the U.S. "fiscal cliff," a worsening euro zone debt crisis, and high levels of household debt, the multinational agency said real economic growth likely slowed to 2 percent this year. It expects growth of just 1.8 percent in 2013.

But it said the economy will start accelerating part way through next year, paving the way for growth of 2.25 percent in 2014. The IMF's World Economic Outlook in October had forecast Canadian real GDP growth of 1.9 percent in 2012 and 2 percent in 2013.

"(If) a shock hits the economy, (households) already have a lot of debt and cannot smooth consumption by borrowing, cannot really borrow their way out of the crisis, and this is where Canada is right now," Roberto Cardarelli, the IMF's mission chief to Canada, said in a briefing to reporters.

"The challenge for policy in this context is to support growth, to make sure that the support to growth is not going to disappear over the next few quarters and to make sure that this gradual unwinding of excesses in the housing sector is ... gradual."

SEES C$ AS OVERVALUED

The IMF expects stronger exports and business investment to contribute to the pickup in growth in the second half of 2013, helped by more certainty in the United States, Canada's largest trading partner.

Exports have struggled because of the relatively strong Canadian dollar, which the IMF saw as 5 to 15 percent overvalued given the country's wide current account deficit <ID:L1E8MT3I4>.   Continued...

 
Joggers run past the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie