OECD urges Canadian interest rate hike

The Organization for Economic Co-operation and Development is again urging Canada's central bank to begin hiking interest rates. In its latest economic outlook issued Tuesday, the Paris-based research group suggests Canada's benchmark rate go up .25 per cent this fall in the first of a series of hikes that would see the overnight target rate hit 2.25 per cent by the end of 2013. The OECD issued similar advice to increase the overnight rate last year, but Bank of Canada Governor Mark Carney has held the rate at a steady one per cent since September 2010. "It is assumed here that the first policy rate increase will be implemented in autumn 2012, which is a few months ahead of current market expectations," the report states. "However, on this projection, further increases towards the neutral rate will also be needed in 2013 to hit the inflation target." As the benchmark for bank prime lending rates, the overnight target rate influences how much Canadians pay for everything from personal lines of credit and mortgages to business loans. Spurred by the long run of low rates, Canadian household debt has risen to approximately 150 per cent of disposable income. Carney has acknowledged the surging debt levels are largely driven by mortgage lending, as Canadians take advantage of low borrowing costs to finance purchases of homes and condos. Finance Minister Jim Flaherty has already tightened the rules for government-backed mortgages, warning all Canadians against overstretching their budgets in the event interest rates do edge up. In its latest cost of living report, Statistics Canada said that annual inflation edged up one-tenth of a point to two per cent in April, while the core, underlying price measure rose two-tenths to 2.1. Analysts nevertheless continued to expect Carney to stay the course until at least early 2013. The ongoing economic turmoil in Europe, however, and its uncertain potential impact on the world economy continues to be the elephant in the room. In the latest edition of its biannual economic outlook, the OECD said its average forecast was for the eurozone economy to shrink 0.1 per cent this year, followed by 0.9 per cent growth in 2013. But it warned conditions are ripe for the economies of the 17-nation eurozone to contract as much as two per cent this year. In his comments to reporters ahead of the report's release Tuesday morning, OECD Chief Economist Pier Carlo Padoan said conditions have unfolded perilously close to the "downside scenario" his influential group outlined in November. If conditions worsen, Padoan warned it, "could lead to a severe recession in the euro area and with spillovers in the rest of the world." Crunching the numbers Tuesday morning, BNN's Pamela Ritchie said the OECD is warning of a toxic cocktail brewing in the eurozone. "You've got weak banks in Europe and you have increasing and high sovereign debt," Ritchie told CTV's Canada AM. "The difficulty is you have the banks and the governments connected in so many ways it could well paint a very dismal picture if some money is not injected." Padoan noted the split between the eurozone's stronger economies -- France and Germany are both expected to grow by 2 per cent and 1.2 per cent in 2013 respectively -- and the southern economies mired in or nearing recession. Echoing the calls France's newly-elected President Francois Hollande, Padoan suggest eurozone leaders adopt a "growth compact" to promote growth even while reducing deficits. The OECD's outlook for rest of the world is much different, however. The report predicts Canada's gross domestic product will expand by 2.25 per cent in 2012 and 2.5 per cent the following year. Asian economies are expected to remain strong, led by a prediction China's economy will grow by 9.3 per cent in 2013.