OECD trims forecasts for Canada, predicts rate hikes starting May 2015

OTTAWA – The Organization for Economic Co-operation and Development has trimmed its forecast for the Canadian economy and is predicting the Bank of Canada will start raising its key interest rate in late May.

In its latest outlook Tuesday, the OECD predicted the Canadian economy will grow by 2.4 per cent this year, 2.6 per cent in 2015, and 2.4 per cent in 2016, largely driven by export demand from the U.S. economy.

The estimate was down compared from the group’s May forecast that predicted the Canadian economy would grow by 2.5 per cent this year and 2.7 per cent in 2015.

“Exports will be supported by stronger foreign-market growth and recent currency depreciation,” said the report.

“Business investment should strengthen with improved demand, to boost capacity and cost competitiveness.”

The OECD said the forecast was based on the Bank of Canada starting to raise its key interest rate in late May next year and steadily after that.

The report noted that inflation, a key driver of interest rates, has returned to the two per cent target range used by the Bank of Canada due in part to the weaker loonie.

“Given the uncertainty surrounding the amount of economic slack, the Bank of Canada should maintain its current policy stance for the time being,” the report said.

“But it will have to start to withdraw stimulus as remaining slack is progressively taken up.”

This isn’t the first prediction by the OECD about rate hikes in Canada.

In its economic outlook last year, the organization forecast that the Bank of Canada would start raising interest rates in the fourth quarter of 2014 with the rate steadily rising to 2.25 per cent by the end of 2015.

The central bank has maintained its key interest rate a one per cent for more than four years.

In its October monetary policy report, the Bank of Canada predicted economic growth will average about 2.5 per cent next year before gradually slowing to around two per cent by the end of 2016.

The central bank also noted that it expects the Canadian economy will gradually return to its full production capacity in the second half of 2016 and core inflation to remain around two per cent over its projection horizon.

Overall, the OECD report said the global economy continues to run in “low gear” well below the pace set before the financial crisis.

The Paris-based group also noted that the main upside risk to its forecast for the Canadian economy is that U.S. investment growth rebounds more than expected, while a domestic housing market correction is the main downside risk.

“Lower growth in China could also weaken oil and other commodity prices and hence the terms of trade,” the report said.