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IMF Tells Canada to Delay Higher Rates Until Late 2013

Dec. 19 (Bloomberg) -- The Bank of Canada should refrain from raising interest rates until the end of next year to help fuel growth, and the country should use regulation to stem a further build up of household debt, the International Monetary Fund said.

“The beginning of the monetary tightening cycle should be delayed until growth strengthens again,” the Washington-based fund said in a report on the Canadian economy, adding the central bank has room for further monetary easing if growth fades. “The current monetary policy stance is appropriately accommodative given the negative output gap.”

Canada’s central bank has kept its key lending rate at 1 percent for more than two years, the longest pause since the 1950s.

The IMF said global economic uncertainty, including concern that more than $600 billion in tax increases and spending cuts will begin next month in the U.S. if Congress doesn’t act, is containing growth in Canada. The country’s expansion is forecast to be “just below 2 percent” in 2013.

The impact on Canada from fiscal tightening in the U.S. will be about three-quarters of the effect in the U.S., the IMF said, adding the current pace of fiscal consolidation in Canada is “appropriate.” The IMF said the federal government is on track to balance its budget by 2015 and has room for a new temporary fiscal stimulus package if needed.

Housing Market

Measures taken by regulators to stem household borrowing have helped to cool the country’s housing market, after home prices and building rose to levels that are not “consistent with economic fundamentals,” the IMF said. Finance Minister Jim Flaherty tightened rules on government-insured mortgages in July for the fourth time in four years, while the Office of the Superintendent of Financial Institutions, the country’s banking regulator, introduced tougher standards for mortgage lenders.

“Should the household debt-to-income ratio continue to rise, additional measures may be needed,” the IMF said in its Article IV mission concluding statement.

Canada’s housing market will see a 1 percent to 2 percent price drop over the next two to three years after expanding too far, Roberto Cardarelli, the head of the IMF’s mission to Canada, told reporters in Toronto. There is little risk of a boom-bust cycle in the Canadian market similar to that seen in the U.S., he said.

“We don’t see the housing sector as a risk, per se,” Cardarelli said. “The risk is that if something happens outside of Canada, the fiscal cliff for example, it’s going to find Canada in a more vulnerable position.”

House prices are 10 percent above where they should be, based on economic fundamentals, he said. “This will be unwound over the next four or five years. The housing sector will move to levels that are more sustainable.”

Canadian home prices fell 0.4 percent in November from October, according to the Teranet-National Bank Composite House Price index. Data showed that prices declined in 10 of 11 cities for the first time since February 2009.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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