Canadian economy to remain strong despite rate rise: OECD

The Canadian economy will continue to grow at close to potential for the next two years, the Organization for Economic Co-operation and Development forecast in its latest report. But the Paris-based organization strongly advised Canada to raise its interest rates to keep inflation in line.

The Bank of Canada "will need to continue" to move interest rates higher, the OECD warned in its Economic Outlook on Tuesday. "Given the buoyant macroeconomic outlook, any additional fiscal stimulus should be avoided," it said.

In its report, the OECD, which has 30 member countries, suggested that the central bank should increase its overnight lending rate to 4.25 per cent by the end of 2007. The bank has already raised its rates twice since September, to 3 per cent.

The next rate-setting meeting is scheduled for Dec. 6.

Inflation aside, the OECD was full of praise for the Canadian economy. The economy has proved to be "extremely resilient" in recent years, it said, and that is allowing the country to handle a sharp rise in the Canadian dollar, compared with foreign currencies, and a coming slowdown in domestic demand.

Energy prices have, admittedly, pushed inflation above normal targets, but that is largely a temporary phenomenon. And, improvements in the world economy should make up for any declines in the domestic market, it said.

Given those factors, the OECD expects Canada's economy to grow by 3.2 per cent in 2006 and 3.1 per cent in 2007, up from 3 per cent this year.

Those estimates are higher than those of the Bank of Canada. The BoC lowered its forecast of economic growth in its update on monetary policy last month, citing a stronger Canadian dollar, higher energy prices and slower productivity growth.

Now, the BoC predicts, the domestic economy will grow by 2.9 per cent in 2006, down from its July estimate of 3.3 per cent.

The OECD report was released shortly after the federal government announced a sharp rise in the current account surplus for the third quarter. The surplus – a measure of Canada's trade health – almost doubled to $9.26 billion, the third-highest ever, and far above the expected $8.9 billion.