OECD urges Bank of Canada to raise interest rates - Macleans.ca
 

OECD urges Bank of Canada to raise interest rates


 

Canada should raise interest rates to curb inflation and cool the housing market, according to the Organization for Economic Cooperation and Development. As the Globe and Mail reports, the Paris-based group’s policy advice will stoke the already heated debate in Canada over whether the central bank’s decision to keep interest rates at record lows is causing a housing bubble in the country.

The OECD says the Bank of Canada should raise the benchmark rate by 1.25 per cent between this fall and the end of 2013. That would leave the overnight rate at 2.25 per cent.

Although that would keep the interest rate at a near-historic low, it would create an unprecedented spread between the Canadian and American rates, which would put upward pressure on an already-valuable loonie.

Bank of Canada Governor Mark Carney has resisted pressure to raise the benchmark rate because of concerns about the overall fragility of the economy. Also Tuesday, the OECD warned that the ongoing eurozone debt crisis poses the greatest risk to global economic recovery, especially as efforts to balance budgets through austerity appear to be losing popularity in countries like Greece, Germany and France.

“Elections in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit,” said OECD chief economist Pier Carlo Padoan, quoted by the AFP. Padoan added that “rising unemployment and social pain may spark political contagion and adverse market reaction” in countries outside the 17-member eurozone.


 
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OECD urges Bank of Canada to raise interest rates

  1. “OECD says the Bank of Canada should raise the benchmark rate by 1.25 per cent between this fall and the end of 2013”

    I think the last bit of that sentence is crucial. I would think a lot of people might agree with that statement, but would not agree that rates need to be raised right now, or even in the next couple of months.

    • According to Keynes, the boom, not the bust, is the time to bring in austerity measures and jack up interest rates. The reason they have been stuck so low for so long is because they are not enough to get the economy rolling again.

      The actual interest rate the US needs to stimulate the economy is below zero. Since banks can’t pay people to borrow money, people hold on to their money instead of spending and investing it, even though it gets lousy returns (“liquidity trap.”)

      To get interest rates back up to normal levels we have to bring about a strong, even slightly-inflationary, recovery. When the economy is on solid ground, interest rates can be restored and people can get better returns on their savings. Then if the economy starts to slip into recession, the central bank has enough room to stimulate the economy.

      The Japanese were stuck in a similar situation for over a decade. Any central banker eager to get interest rates back up will find himself stuck in the trap.

    • Except, that, according to what I see on the OECD site, they did no such thing.

      Can anybody find any evidence whatsoever that the Globe and Mail isn’t just making shit up? Maybe it’s there, but I looked around the site, and the most recent thing I found for Canada was a may 2012 outlook that said our rates are set appropriately, and should be increased once things get better.

      Specifically: ”
      The Bank of Canada’s highly accommodative monetary stance is appropriate in light of the downside risks to the economic outlook and the fiscal tightening, but withdrawal of monetary stimulus will be warranted when these risks recede. ”

      http://www.oecd.org/document/55/0,3746,en_2649_37443_45268663_1_1_1_37443,00.html

  2. No doubt the best way to deal with a housing bubble is to jack up interest rates and cause it to burst…

    The European Central Bank raised interest rates last year to fight imaginary inflation and killed off the European recovery.

    I’m hoping Carney raises interest rates like they suggest. That will cause a highly overvalued-dollar to get even higher producing a made-in-Canada recession (likely deeper than the fist one in 2008) just in time for the next election. It will prove the ill-effects of the Dutch Disease and Harper will become the next R. B. Bennett:

    “Although there was no unity among the motley political groups that constituted his opposition, a consensus emerged that his handling of the economic crisis was insufficient and inappropriate, even from Conservative quarters.” (Wiki on Bennett)

  3. Carner is trying to give time to Canadians to adjust their debt load as much as they can so the bubble don’t burst. He has been voicing the real estate owes quite some time. Honestly, I think that Canada needs a recession and not a mild one. I am not saying to come with one out of no where, but if there is a bubble you need to burst it. There is no other way. There has to be a correction in the market and expect a smooth correction through the years in my view is inappropriate

    Attacking the Demand by changing the term of the mortgage and down payment are not not enough. The Banks lend according to lending policies defined by CMHC. A simple rule that would produce more effect would be putting a cap on the mortgage in a way where the housing costs must be equal or less to 25% of the gross salary. That will for sure bring changes in the real estate and on the demand. Another option is to create a combination of housing costs as per to % of gross income commitment and LTV ratio. (loan to value).