IMF sees limited room for Bank of Canada rate cut

Mon Feb 3, 2014 10:30am EST
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By Louise Egan

OTTAWA Feb 3 (Reuters) - The International Monetary Fund (IMF) says Canada's central bank is likely to hold its main interest rate steady until early 2015, and said the bank has limited room to cut rates because of overvalued housing prices and record-high 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, but highlighted concerns that growth is still too reliant on consumer spending and home-building, while exports and business investment lag.

"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". Analysts in a Reuters poll conducted just before the bank's Jan. 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.

Average house prices in the country are still overvalued by 10 percent, the IMF estimated, saying prices were high relative to income and rents, compared with historical averages, and compared with prices in many other advanced economies.   Continued...