OTTAWA, Oct 8 (Reuters) - The International Monetary Fund expects Canada's economy to grow slightly more than 1.5 percent this year and 2.25 percent next year while it sees the Bank of Canada refraining from interest rate hikes until the second half of 2014.
In its World Economic Outlook on Tuesday, the Washington-based lender's forecasts for Canada were slightly lower than the central bank's projections in July of 1.8 percent and 2.7 percent growth in 2013 and 2014, respectively.
However, Canada's central bank is due to update its outlook on Oct. 23 and Senior Deputy Governor Tiff Macklem made clear last week the numbers will be downgraded after he sharply cut the forecast for third-quarter growth in a speech.
The IMF linked Canada's growth prospects directly to the U.S. recovery, which it says will strengthen exports and business investment as domestic consumption cools. The forecasts assume the U.S. government shutdown is short-lived and the U.S. debt ceiling is raised promptly.
"The balance of risks to Canada's outlook is still tilted to the downside, emanating from potentially weaker external demand," the report said.
The accommodative monetary policy in place in Canada since the 2008-09 recession remains "appropriate," the Fund said, predicting gradual tightening to start in late 2014 from the current 1.0 percent rate. Analysts in a Reuters poll forecast a first rate hike in the fourth quarter of next year.
Canada's record-high household debt earned it a mild warning from the IMF, which said the trend could amplify any shock to the economy.
It also identified big provincial budget deficits and debt as a vulnerability, without naming specific governments.