OECD urges Canada to hike rates this fall to cool housing market



Canada’s economy is gradually recovering and is expected to grow by 2.25 % this year and 2.5 % in 2013,

according to a new report by the Organization for Economic Co-operation and Development.


Private consumption and investment will continue to be the primary drivers of growth in Canada, the report, said

which was published Tuesday.


Canada’s growth will slightly outpace the OECD average, which is expected to be 1.6% in 2012 and 2.2%.


Dow Jones reported that OECD economist Peter Jarrett said the improved Canadian outlook “more than offsets

persistent weakness in European export markets and the resulting uncertainty through the rest of the OECD and

the world economy.”


Jarrett described the housing market as the “biggest story in Canada.” Home prices, which corrected about 10%

during the recesion, have surged again, “making household balance sheets look increasingly fragile, he said.


Jarrett said macroprudential measures will probably be enough to cool markets in some cities but are “almost

certainly, we feel, not enough in places like Toronto and probably not enough, therefore, in the aggregate level.”


He said the government is right to be worried and predicted that the central bank will also have to act because

negative real short-term rates risk are stoking a housing bubble.


The OECD is calling on the Bank of Canada to raise interest rates by 25 base points this fall, followed by similar

increases in each quarter next year, according to Dow Jones. The organization called Canada’s current monetary

stance “appropriate” in light of downside economic risks related to raising interest rates.


The benchmark interest rate in Canada has been 1% since September 2010.


The OECD flagged Canada’s housing sector as imbalanced, but noted stiffer lending rules surrounding

mortgages have helped reduce risk. The report comes on the heels of a Fitch Rating report released Monday that

called Canada’s fast-climbing housing prices and record household debt levels unsustainable.


Overall the global economy is slowing recovering, the OECD said, but at substantially different rates.


The eurozone crisis is dragging down the overall economic recovery.


“The crisis in the eurozone remains the single biggest downside risk facing the global outlook,” said OECD chief

economist Pier Carlo Padoan in a statement.


Heading into a European Union summit in Brussels this week, the OECD urged leaders to take immediate action

to avoid a deepening of the crisis in the euro zone and spillover effects to other nations.


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