Wednesday, May 26, 2010

The Bank of Canada should raise interest rates "without delay" and continue to gradually hike throughout this year and next, the Organization for Economic Co-operation and Development said Wednesday.

The recommendation comes just six days before central bank officials announce a decision on whether to boost its key lending rate from a record low.

Strategists had thought, until lately, a June 1 rate hike was a done deal after a string of stronger-than-expected Canadian economic reports. That certainty has ebbed, though, as European debt problems shake global confidence. The OECD, for its part, thinks the central bank should act swiftly to raise rates.

"The

Bank of Canada should start normalizing its policy rate without delay and tighten gradually throughout the projection period" of 2010 and 2011, it said in a global economic outlook.

The report made no mention of how the recent turmoil in Europe â€" which has caused stock markets to fall, the Canadian dollar to dive and commodity prices to weaken â€" could affect its projections for Canada.

That wrinkle has sparked uncertainty about whether the central bank will hike next Tuesday, or opt to wait until its next meeting in July.

"Next Tuesday's BoC announcement is a close call," Bank of Nova Scotia economists said. "We still think they'll hike 25 basis points, but the odds have moved to about 65% in our view, or slightly higher than the coin-toss priced into the market."

The OECD also boosted its forecast for the Canadian economy, to 3.6% this year and 3.2% next year.

The Canadian economy is rebounding "vigorously" from the recession, lifted by a recovery in trade and fiscal and monetary policy measures, it said. The pace of recovery is expected to moderate going forward as policy stimulus is withdrawn, inventory rebuilding slows and households boost savings.

Unemployment should keep falling and inflation pressures will remain muted, it said.

However, the high rate of household indebtedness "is a source of risk to the outlook," the report cautioned.

Governments should now let stimulus measures expire to avoid overheating the economy, the OECD said. They should now give details on recently announced fiscal consolidation plans, focus on spending reductions, and embark on the structural reforms these plans require.

The Paris-based Organization for Economic Co-operation and Development is comprised of 31 member nations

OECD recommends Canada raise rates