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.