Bank of Canada should hike rates to pop bubble: former BoC aide

Wed May 15, 2013 1:10pm EDT
 
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OTTAWA (Reuters) - The Bank of Canada should raise interest rates now because five years of low rates are creating distortions in the economy, such as excessive debt and an overheated housing market, a former adviser to central bank Governor Mark Carney said on Wednesday.

In a hawkish stand at odds with most economists and market players, Paul Masson, now a professor at the University of Toronto's Rotman School of Management, said the central bank should tighten monetary policy to lean against asset price bubbles rather than focus exclusively on inflation.

Masson was Carney's special adviser from 2007 to 2008 and a senior official at the bank's monetary and financial analysis department in the early 1980s.

The bank next sets rates on May 29. It has held its benchmark rate at 1 percent since September 2010.

"Some of the symptoms of inefficient investment and asset price bubbles are already evident in Canada, in the housing sector for instance," Masson said in a paper published by the C.D. Howe Institute, a think tank.

"The cumulative effect of artificially low interest rates also risks fueling an underlying inflationary process. ... Therefore, the Bank of Canada should start now to reverse some of the monetary stimulus and begin raising interest rates."

The May 29 policy meeting will be Carney's final rate decision before he steps down to head the Bank of England. Stephen Poloz, head of Canada's export credit agency, takes over as Bank of Canada governor in July.

Masson said financial imbalances and risky investment decisions are spreading. In addition to the overheated housing market, he cited record-high levels of household debt.

"The longer the boom lasts, the more likely it will end in tears," he wrote.   Continued...