OTTAWA (Reuters) - Canada should be ready to hike interest rates later this year if the economy doesn't turn sour, but 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 off 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. But there are also short-term downside risks resulting from fiscal consolidation and a strong currency, it added.
"Monetary policy remains appropriately accommodative given persistent global headwinds and associated risks and the withdrawal of fiscal stimulus, but it should stand ready to react to signs of a pickup in inflation," it said.
"As the year 2012 wears on, and if the downside risks fail to materialize, consideration will have to be given to withdrawing more stimulus by raising policy rates."
Referring to federal and provincial budget cuts, the OECD said: "This tightening is necessary to reduce the debt overhang resulting from the past recession and stimulus measures, but the authorities should slow the pace of consolidation if significant downside risks to growth materialize."
The survey projected real economic growth in Canada of 2.2 percent this year and 2.6 percent next year. By contrast, the Bank of Canada's April forecast is for 2.4 percent growth in both years.
The large majority of the 128-page report was dedicated to the need to boost innovation to raise historically weak productivity growth to sustain living standards.
"Canada's overall productivity has actually fallen since 2002, while it has grown by about 30 percent over the past 20 years in the United States," the OECD said.
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The Paris-based OECD also said Canadian authorities may have to take measures to try to limit household indebtedness and cool off 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. But there are also short-term downside risks resulting from fiscal consolidation and a strong currency, it added.
"Monetary policy remains appropriately accommodative given persistent global headwinds and associated risks and the withdrawal of fiscal stimulus, but it should stand ready to react to signs of a pickup in inflation," it said.
"As the year 2012 wears on, and if the downside risks fail to materialize, consideration will have to be given to withdrawing more stimulus by raising policy rates."
Referring to federal and provincial budget cuts, the OECD said: "This tightening is necessary to reduce the debt overhang resulting from the past recession and stimulus measures, but the authorities should slow the pace of consolidation if significant downside risks to growth materialize."
The survey projected real economic growth in Canada of 2.2 percent this year and 2.6 percent next year. By contrast, the Bank of Canada's April forecast is for 2.4 percent growth in both years.
The large majority of the 128-page report was dedicated to the need to boost innovation to raise historically weak productivity growth to sustain living standards.
"Canada's overall productivity has actually fallen since 2002, while it has grown by about 30 percent over the past 20 years in the United States," the OECD said.
yahoo.com
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