IMF warns of risks to Canada’s muted growth

* IMF highlights risks to Canada as recovery slows

* Central bank should keep rates low, can ease further

* Canadian dollar seen “firm”, risk of upward pressure

* Fiscal policy tightening could be smoother

OTTAWA, Dec 22 (BestGrowthStock) – There are big risks to Canada’s
economy as the recovery slows and officials should be ready to
take additional steps to safeguard growth if necessary, the
International Monetary Fund said on Wednesday.

The IMF forecast modest growth for this year and next, in
line with the Bank of Canada. But it warned of the risks to
that outlook, suggesting the federal government should not rush
to balance its budget too quickly and that the central bank
should keep interest rates low.

Both the government and the bank have room to maneuver
should the global economy worsen, it said.

“Growth is expected to be muted in the second half of 2010
and 2011 as household debt has run up to high levels, housing
markets are cooling and fiscal stimulus is waning,” the
Washington-based lender said in its staff report on Canada.

“Risks are tilted to the downside, with a key risk that the
global recovery stalls.”

The Canadian dollar is “on the firm side,” but not
significantly overvalued, the IMF said. But there is a chance
that Canada’s higher interest rates could attract capital from
other low-rate markets and add upward pressure on the currency.
The Fund called that scenario “a particular concern in an
environment of sustained global monetary accommodation.”

The report is based on discussions with Canadian officials
that ended Oct. 27. The Canadian dollar (CAD=D4: ) jumped to
parity with the U.S. dollar in April of this year. Since
October it has flirted with parity a handful of times, trading
within a broad range around that level.

The IMF said the Bank of Canada should keep its interest
rate low and in the case of a global shock to the economy, it
should be the first to respond with a rate cut.

“Monetary policy should be the first line of defense if the
outlook deteriorates, given the room to ease quickly, although
fiscal policy has room to respond as well in a downside
scenario.”

The Bank of Canada raised its overnight lending target
three times this year but held the rate steady at 1 percent
since September, pending signs the recovery is entrenched.

The IMF said the government could have taken a more gradual
approach to tackling the fiscal deficit, to soften the impact
on growth. The government has the option of speeding up
infrastructure projects and changing the timeline for planned
corporate tax cuts to help ease the transition, it said.

The IMF predicted gross domestic product growth this year
of 3 percent, slowing to 2.3 percent in 2011.
(Reporting by Louise Egan; editing by Janet Guttsman)

IMF warns of risks to Canada’s muted growth