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(Adds Finance Department reaction, paragraphs 12-13)
By Randall Palmer
OTTAWA, July 13 (Reuters) - Canada should make the central bank's job easier by splitting off responsibility for risks such as overseeing the hot housing market, leaving it to focus on inflation and the broader economy, economists said ahead of a key interest rate decision this week.
The Bank of Canada will decide on Wednesday whether to stimulate a flagging economy by cutting interest rates for the second time this year, a move that would pour fuel on a property market it has called overvalued.
But the government could ease such dilemmas if it followed the lead of Britain and others that separate monetary policy from financial stability issues, two former senior Bank of Canada officials wrote in a paper last month. (tinyurl.com/pvxsu5a)
"It would take away one of the big roadblocks to a potential rate cut," said Bank of Montreal Chief Economist Doug Porter.
Their recommendations included setting up a clear framework for what is known as macroprudential regulation, using regulatory tools such as requiring larger mortgage down payments.
The Bank of Canada's main mandate is to control inflation. Both BoC Governor Stephen Poloz and predecessor Mark Carney, who now heads the Bank of England, have said interest rate policy should be the last line of defense against systemic risk or financial instability.
After January's surprise rate cut, Poloz said the bank had considered the fact that this might boost Canada's high household debt levels by encouraging borrowing, but decided it was a risk it had to take.
"I'm a fan of the old 'one instrument, one target' line of thinking, leaving the central bank to focus on inflation targeting with the interest rate tool," said Royal Bank of Canada Chief Economist Craig Wright.
Any effort to combat financial stability risks should be done via macroprudential regulation, he added.
While parts of the Canadian housing market have cooled, Toronto and Vancouver are red-hot, and the country's ratio of household debt to disposable income is at a near record 163.25 percent.
The Bank of Canada had no comment because of a blackout ahead of Wednesday's monetary policy decision.
The federal finance department said it did not see the need for change because Canada already has a regulatory and supervisory framework "that effectively addresses macroprudential concerns and systemic risk oversight."
The ministry also said it shared the expectation of a soft landing held by the Bank of Canada, the federal housing agency and many private sector observers.
U.S. Federal Reserve Governor Lael Brainard said last year that Britain, Sweden, Switzerland and New Zealand had confronted housing booms with regulation, not rates.
In Britain, a special committee imposed limits on the ratios of loan to value and of debt to income for mortgages on owner-occupied homes.
Canada's Conservative government has stepped in four times since 2008 to tighten mortgage lending rules without a formal framework.
And even if housing was taken care of, said Derek Holt, vice president of economics at Bank of Nova Scotia, it is not clear that the central bank should ease again. (Editing by Jeffrey Hodgson and G Crosse)