OECD urges Canada to raise rates

Canada should raise interest rates "without delay" and let economic stimulus measures expire to avoid inflation, the OECD said in its annual forecast Wednesday.

The Organization for Economic Co-operation and Development recommended the Bank of Canada continue to raise rates to more normal levels over this year and through 2011.

The advice comes six days before the bank is scheduled to announce whether it will increase its benchmark lending rate from record low levels.

Many economists had been predicting that with signs of growing economic recovery, the bank would start raising rates on June 1, but that has become less certain amid concerns that the effects of the European debt crisis may spread, slowing recovery in North America and growth in emerging economies.

The OECD said the bank should proceed with higher rates, and that the government should outline spending cuts and the details of how it plans to reduce its deficit.

One Canadian economist suggested that the OECD statement and forecasts of economic growth may have been compiled weeks ago when the world recovery looked more certain and robust. 

"I have to wonder when this recommendation was cobbled together or if they would be so adamant today," said Douglas Porter, deputy chief economist with BMO Capital Markets. 

"From a domestic standpoint, there is no debate — the Bank of Canada should have been raising rates yesterday. But the reality is we do have the rumblings of what could be a serious global episode in financial markets." 

TD Bank economist Craig Alexander was also taken aback by the directness of the language, as if the OECD had no concerns about how the European crisis would impact markets and the global economy.

"Quite frankly the global economy doesn't look like it's going to be booming," Alexander said. "There are lots of risks related to the U.S. recovery, it's very clear Europe is going to be materially weaker, the global financial system is trying to assess sovereign debt risk in Europe — all of this would suggest the Bank of Canada doesn't have to be in a huge rush."

Raises growth estimate

The OECD has also raised its forecast for Canadian economic growth, to 3.6 per cent this year and 3.2 per cent next year.

It said the Canadian economy is recovering "vigorously" from the recession, lifted by a recovery in trade and government stimulus.

It did, however, warn the "high rate of household indebtedness" could undermine the recovery. In its overall forecast for its member countries, the OECD said the world economy is recovering "faster than expected."

But, it said, the debt crisis and overheating in emerging-market economies present increasing risks.

'Critical time for the world economy'

It projected OECD countries will grow by 2.7 per cent this year and 2.8 per cent in 2011.

Its forecast called for the U.S. economy to grow at a rate of 3.2 per cent in both 2010 and 2011.

It predicts Japan's growth will be 3.0 per cent this year and 2.0 per cent in 2011.

European members of the OECD will be weighed down by the debt crisis, it said, and will growth at 1.2 per cent in 2010 and 1.8 per cent in 2011.

The need to deal with the debt crisis and still get deficits under control will require careful policy co-ordination, said Angel Gurria, the OECD's secretary general.

"This is a critical time for the world economy," he said in a statement.