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Poloz Should Keep Key Rate Low on Growth Risk, IMF Says

Bank of Canada Governor Stephen Poloz should keep his benchmark interest rate low until there are clearer signs the economic recovery has taken hold, the International Monetary Fund said.

“With inflation low and downside risks looming, monetary policy should remain accommodative until growth gains further traction,” the Washington-based fund said in its World Economic Outlook report today. New Finance Minister Joe Oliver should also balance his fiscal policy between boosting economic growth and “rebuilding fiscal buffers” after recent deficits, the report said.

Poloz has said the next move in his 1 percent overnight interest rate depends on how the economy evolves. The central bank is counting on a rotation of demand to investment and exports from indebted consumers to spur growth and help bring inflation up to a 2 percent target by the end of next year.

Consumer prices will advance 1.5 percent this year and 1.9 percent in 2015 according to the IMF report. Gross domestic product, a broad measure of economic growth, will accelerate to 2.3 percent this year from 2 percent in 2013, and again next year to 2.4 percent, the fund predicted. The 2014 forecast was 0.1 percentage point faster than the last IMF outlook report in January, while the 2015 forecast was unchanged.

Exports and business investment are at risk from a lack of competitiveness and lower commodity prices, the IMF said today.

The IMF reiterated concern the housing market is a risk to Canada. Poloz, who says the housing market appears to be headed for a soft landing, has warned consumers against excessive borrowing that may be dangerous when interest rates rise.

‘Key Vulnerability’

“Despite the recent moderation in the housing market, elevated household leverage and house prices remain a key vulnerability,” the IMF said.

The unemployment rate will be little changed over the next two years, the IMF said, predicting a 7 percent mark this year and 6.9 percent next year. Statistics Canada said last week the jobless rate was 6.9 percent in March.

The IMF issued its report today ahead of its semi-annual meetings in Washington this weekend. Oliver said yesterday that he’s expecting discussions by policy makers on “things like deflation, which is something we haven’t talked about in Canada for a very long time.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net Chris Fournier

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