IMF sees limited room for Bank of Canada rate cut

Mon Feb 3, 2014 11:39am EST
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By Louise Egan

OTTAWA (Reuters) - The International Monetary Fund (IMF) said Monday Canada's central bank is likely to hold its main interest rate steady until early 2015, and the bank has limited room to cut rates because of overvalued housing prices and record household debt.

After consultations with Canadian officials on the state of the economy, completed in late January, the IMF concluded the Canadian economy will pick up speed in 2014 as exports get a lift from stronger U.S. growth.

It highlighted concerns that growth remains too reliant on consumer spending and homebuilding, but it sees exports and business investment gradually taking over as the main drivers of growth over the next couple of years.

"Monetary policy should remain accommodative until there are firmer signs that growth is picking up above potential, with a sustainable transition from household spending to exports and business investment," the Washington, D.C.-based lender said in its report.

The IMF's projections assume the Bank of Canada's overnight target rate will start increasing in "early 2015" and rise to 4 percent by 2019. Analysts in a Reuters poll conducted just before the bank's January 22 rate announcement predicted the bank's first rate increase would come in the second quarter of 2015.

The bank has kept rates at 1.0 percent since September 2010, but last month it revealed a growing concern about chronically weak inflation, prompting some market players to increase their bets on a rate cut at some point this year.

While the IMF acknowledged a recent cooling of the housing market and household debt, it warned that these problems could flare up again if the bank eases policy.

"The existence of domestic imbalances, however, reduces the room for lowering the policy rate despite the recent moderation in the housing sector and household borrowing," it said.   Continued...

A Bay Street sign, a symbol of Canada's economic markets and where main financial institutions are located, is seen in Toronto, May 1, 2013. REUTERS/Mark Blinch