(Bloomberg) -- Slower growth in consumer debt and a cooler housing market will allow the Bank of Canada to wait until early 2015 to raise interest rates as it waits for a pick- up in exports, the International Monetary Fund said.
Inflation should accelerate to reach the central bank’s 2 percent target by the end of 2015 and growth will quicken to 2.25 percent in 2014 from 1.6 percent this year, in line with the bank’s forecast, the IMF said in a statement by its mission team to Canada.
“We think there’s room for monetary policy to remain as accommodative as it is for the next few months, especially given that inflation is so low.” Roberto Cardarelli, the IMF’s mission chief to Canada, told reporters in Toronto. “We think the Bank of Canada has room to wait and see, to remain on the sidelines for a little while.”
Bank of Canada Governor Stephen Poloz abandoned his bias to raise interest rates last month and issued a monetary policy report that said a forecast increase in exports and business investment had been delayed. Canada’s inflation was an annual 0.7 percent in October, Statistics Canada said Nov. 22, below the bottom of the central bank’s target band.
Policy makers “should remain focused on sustaining growth until the rotation to exports and business investment gains firmer momentum, while assuring that the gradual unwinding of domestic imbalances continues and that the fiscal position is maintained on a sustainable trajectory,” the Washington-based lender said today.
Finance Minister Jim Flaherty can delay his plan to balance the budget by 2015 if there is “no meaningful pick-up in economic growth,” the IMF said in the report.
Mortgage Insurance
Among other policy recommendations, the IMF said Canada should limit the use of government-backed mortgage insurance and shift more risk to the private sector to limit exposure to financial-system risks.
Authorities have been strengthening oversight of Canada Mortgage & Housing Corp., the government agency that insures most mortgages in the country and which would be the nation’s sixth-largest bank by assets. CMHC has been told by the government to behave more like a commercial financial institution.
The agency may be “distorting the allocation of resources,” Cardarelli said. “We think there’s too much credit going to mortgages and too little credit going to productive uses of capital,”
CMHC “makes it easier for the banks to do mortgages than other kinds of lending,” he said, which would be “more useful for the real economy, especially given the productivity gap with other competitors.”
Government Role
“There’s still a role for the government,” Cardarelli said. “We’re talking about scaling it back.” Any move should be gradual so as not to distort a housing market in transition, he said.
Flaherty said in a statement that the report shows the IMF endorses his government’s policies, including those on housing. “I am pleased to see that, once again, the IMF is maintaining its positive outlook for Canada,” he said.
Canada’s housing market is 5 percent to 10 percent overvalued, Cardarelli said, which is lower than last year. “The supply and demand dynamics in the market we think is working its way out,” he said, adding that the oversupply in Toronto could be absorbed in five years.
The IMF also called on Canada to maintain an open regime for foreign direct investment in the nation’s energy industry. The federal government announced it would limit state-owned enterprises’ ability to acquire companies operating in Canada’s oil sands after it allowed China’s Cnooc Ltd. to buy Nexen Inc. last year.
Investment Lacking
“We see the sector suffering from lack of investment,” Cardarelli said. “We recognize the importance of designing the FDI regime in a way that is consistent with political, national, interests and priorities, but we still see room for more investment in the sector.”
The Fund doesn’t prefer private investment over state-owned enterprises, he said.
The IMF also advocated for a single Canadian entity that would have broad “macro-prudential” regulatory powers across all financial institutions and markets to lessen “systemic risks.”
