Bank of Canada says rate hikes 'appropriate'

The Bank of Canada repeated Thursday that the country's economy is growing "somewhat more rapidly" than it expected in January.

The central bank, in its quarterly Monetary Policy Report, said the economy grew at the fastest pace in a decade at the start of the year, but has started to slow down — with the housing sector taking the lead.

Still, it said, higher interest rates would be "appropriate."

In a news conference after the report's release, bank governor Mark Carney, in response to a journalist's question, said that he saw a proposed bank tax as a "distraction" from what should be the core agenda of financial reform.

The International Monetary Fund has proposed that banks be taxed on their borrowing, with the proceeds set aside for a bailout fund in times of economic crisis.

The proposal is expected to be a hot topic when finance minister and central bankers from the Group of 20 economic powers meet beginning on Friday in Washington.

Canada's finance minister, Jim Flaherty, has said he opposes the idea.

Carney said it would be better to focus on requiring banks to increase the amount of share capital underpinning their debt, constrain their borrowing and come up with better ways to prevent runs on investment banks. Those runs happen when lenders stop providing money to banks because of the fear of bankruptcy.

Carney also came out in favour of contingency capital, or requiring that banks convert some of their debt into shares in a crisis, in order to constrain reckless borrowing by holding out the fear of losses by shareholders.

GDP likely rose 5.8%

The bank said gross domestic product likely increased by 5.8 per cent in the first three months of this year, fuelled by government stimulus and robust consumer spending. That would be the fastest rate of growth since the fourth quarter of 1999.

As well, the withdrawal of government stimulus, the high Canadian dollar and continued low demand in the United States will further drag the economy.

The bank repeated its prediction for 3.7 per cent growth this year, and forecast growth of 3.1 per cent in 2011 and 1.9 per cent in 2012.

The assessment comes two days after it ended a pledge to keep its benchmark interest rate at a record low 0.25 per cent until July.

The bank also updated its assumption on the level of the Canadian dollar, saying it will average 99 cents US through 2011, an increase from its January assumption of 96 cents.