Canada may need to raise rates this year: OECD

Wed Jun 13, 2012 1:46pm EDT
 
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OTTAWA (Reuters) - Canada should be ready to hike interest rates as soon as the fourth quarter of this year if the economy doesn't turn sour, but it may need to slow down budget tightening if the economy does deteriorate, the Organization for Economic Cooperation and Development said on Wednesday.

The Paris-based OECD also said Canadian authorities may have to take measures to try to limit household indebtedness and cool the housing market if imbalances persist.

It said the Bank of Canada faces a delicate balancing act, with prolonged low interest rates raising concerns about risks for the financial system. There are also short-term risks to the economy resulting from deficit reduction and a strong currency, it added.

"We think that the Bank of Canada will have to return to its policy of withdrawing stimulus, starting fairly soon, probably in the fourth quarter, so as to head off an upward drift in inflation that is currently right on target," Peter Jarrett, who is in charge of Canada at the OECD's economics department, told reporters after the release of the organization's report on Canada.

The Bank of Canada targets 2 percent annual inflation, and that was the inflation rate in April.

Jarrett emphasized that the OECD's rate-hike scenario assumes that the European debt crisis will be contained and that Canada is not hit by contagion from it.

In the worst-case scenario of another global financial crisis and recession, he said the central bank could cut rates from the current 1 percent and prepare for possible quantitative and credit easing, reviving a plan it unveiled in the 2008-09 crisis but never used.

"Obviously it depends on how nasty, how tough things get out there but if it's something of the same order of magnitude (as 2008), if there's threats to the system, I think there's no reason why the Bank of Canada would hesitate to go back and do at least what they did before, much less start doing something that is labeled quantitative easing," Jarrett said.

"But they certainly have more room to cut rates if things get really tough," he said.   Continued...