OTTAWA May 31 The Bank of Canada should keep
interest rates low and Canada's federal government should be
ready with more fiscal stimulus in the event of an economic
downturn, the International Monetary Fund said on Wednesday in a
report that reiterated warnings about Canada's hot housing
market and high household debt.
In an annual assessment of Canada's economy, the IMF said
while it expects the recovery to gain momentum in the near term,
risks to the outlook are significant - including a sharp
correction in housing and U.S. protectionism.
The IMF staff said the Bank of Canada's cautious approach is
justifiable given the "considerable uncertainty" around the
economic outlook, and said monetary policy should stay
accommodative and gradually tighten as signs of durable growth
and inflationary pressures emerge.
"The Bank could aim to achieve a small and temporary
overshoot of the inflation target to better manage the downside
risks to the inflation outlook and reinforce the symmetry of the
inflation target," the report said.
The central bank has held rates steady at 0.5 percent since
2015 in a bid to boost growth in the wake of an oil price slump.
The IMF warned a sharp correction in housing could hurt the
nation's banks, which have already been downgraded, trigger
negative feedback loops in the economy, and lead to contingent
claims on the government.
"Financial stability risks could emerge if the housing
market correction is accompanied by a severe recession," the
House prices in Toronto and Vancouver, the nation's largest
markets, have more than doubled since 2009 but signs of a
slowdown have emerged in the wake of repeated government moves
to tighten mortgage lending and the introduction of a foreign
buyers tax in those two cities.
Still, the IMF said a further tightening of macroprudential
and tax-based measures should be considered to mitigate
speculative and investment activity.
It said the foreign buyers tax is discriminatory and urged
authorities to replace it with rules or taxes aimed at
discouraging speculation without targeting non-residents.
While growth is seen rising to 2.5 percent this year as oil
prices stabilize and U.S. growth boosts Canada's economy, GDP
growth is expected to slip to 1.9 percent next year as stimulus
fades and U.S. growth moderates.
The IMF said fiscal stimulus should be the first line of
defense if downside risks materialize, because there is a risk
further easing of monetary policy could worsen household debt
and housing imbalances.
(Reporting by Andrea Hopkins; Editing by Andrea Ricci)