Tame growth for Canada’s economy means low interest rates for longer: IMF

The world’s key nation lender and fiscal watchdog has given Canada’s economy a passing grade — but just barely. While growth is likely to pick up this year, it will be a modest gain and won’t point to the much-needed rotation from household spending and residential construction toward exports and business investment, the International Monetary Fund acknowledged Monday. These economic imbalances are not without risks, the IMF said in its latest assessment of Canada. Among them, limiting the flexibility of monetary policy and possibly requiring the federal government to delay its budget balancing commitment. Despite the recent moderation in the housing market and pace of consumer borrowing, the Washington-based agency said the environment of record-low borrowing costs and a still-hot housing market “reduces the room for lowering the [Bank of Canada’s] policy rate.” Instead, the IMF said policymakers should maintain their current 1% trendsetting lending level “for a longer period” before making any adjustment — with the most likely scenario still being a rate hike, not a cut. The central bank’s overnight rate — the target for lending between financial institutions — has been on hold since September 2010, and most economists don’t expect a move until mid-2015. The IMF, however, anticipates a rate increase will come earlier in that year. “Monetary policy should remain accommodative until there are firmer signs that growth is picking up above potential, with a sustainable transition from household spending to exports and business investment,” the report said. “Thanks to rising household wealth and still-easy financial conditions, private consumption growth remained robust, but the household debt-to-income ratio reached a new historical high in the second half of 2013,” it said. Related “The housing market has cooled, owing in part to macro-prudential measures adopted in the past, but house prices remain overvalued, although with important regional differences.” Finance Minister Jim Flaherty has tightened mortgage-lending rule four times in an effort to limit access to loans for those consumers least likely to afford additional debt. “Measures introduced over the past years have been effective in moderating the pace of household debt accumulation and cooling off the housing markets,” Mr. Flaherty said in a written response to the IMF’s findings. Meanwhile, the IMF — after completing talks with Canadian officials late last month — also stressed “if significant downside risks to growth materialize, the federal government has room to slow its planned return to a balanced budget” in 2015, the year of the next election. As well, it said, “provinces with a weak fiscal position might need to consider additional measures to ensure their deficit reduction timetable is met.” “[IMF] directors underscored the importance of addressing long-term fiscal sustainability challenges at the general government level.” Mr. Flaherty is scheduled to deliver his 2014 federal budget on Feb. 11, a document the minister said will continue to follow the government’s debt-reduction schedule. “To ensure that Canada remains well-positioned to withstand any future shocks and is able to address the future priorities of Canadians, it is vital to the government’s good economic stewardship that it remains vigilant and balance the budget in 2015 to maintain Canada’s economic advantage,” he said. In Monday’s report, the IMF forecast Canada’s economy to grow 2.2% this year, up from its 1.7% estimate for 2013. The outlook is below the Bank of Canada’s prediction of 2.5% for both this year and 2015. “Despite the depreciating exchange rate, non-energy exports remained well below the levels reached after earlier recessions,” the IMF said. “These low export levels reflect not only the slower recovery in external demand but also increased challenges to competitiveness.” The Canadian dollar traded at a four-year low of around the US90¢ on Monday. © Copyright (c) National Post

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