OTTAWA (Reuters) - The Bank of Canada should be ready to cut interest rates again if growth falters, though the economy looks set for a modest recovery from the oil price shock in the near term, a report from the International Monetary Fund said on Monday.
In an annual assessment of Canada's economy, IMF staff said that the Bank of Canada's decision to cut rates last year, along with the depreciation of the Canadian dollar, have helped to cushion the effects of cheaper oil, which is a major export for Canada.
Although the central bank should consider moving again if necessary, room for additional cuts is limited with rates already at 0.50 percent, the report noted.
The bank could use unconventional monetary policy measures if the economy slowed significantly or there were signs of deflation, but clear communication would be critical, the report said.
The bank last year updated the extraordinary tools it has at its disposal, which include negative interest rates, forward guidance, large-scale asset purchases and funding for credit.
Nonetheless, it should not be up to monetary policy alone to support the economy and the federal government has room to increase its fiscal support if the situation weakens, IMF staff said.
The budget released by the new Liberal government earlier this year is "appropriate" with its spending on infrastructure to boost growth. The report estimated that the stimulus measures will boost annual growth by 0.5 percentage point of gross domestic product in each of the next two fiscal years.
While growth is seen rising to 1.75 percent this year and 2.25 percent next year, the risks to Canada's outlook are to the downside as oil prices remain low, and with increased uncertainty about global growth prospects.
The potential for a severe recession to destabilize Canada's housing market is also a risk as the use of government-backed mortgage insurance could lead to a considerable impact on the government's fiscal position.
Still, steps taken by the government in recent years to reduce risk in the housing market have been "broadly effective", the report said, recommending a cap on loan-to-income ratios could be introduced to tackle regional imbalances.
Reporting by Leah Schnurr; Editing by Nick Zieminski