The Bank of Canada should raise lending rates in order to curb creeping inflation, says a new report from the Organization for Economic Co-operation and Development.
The Paris-based OECD released its global Economic Outlook on Wednesday.
"Monetary policy is currently very accommodative, and short-term inflation expectations appear to be inching upwards," the report states. "The Bank of Canada should soon resume tightening at a moderate pace."
Peter Jarrett, a senior economist with the OECD who oversees Canada and six other countries, said the organization is recommending the Bank of Canada increase interest rates by 25 basis points within the next quarter.
"There has been a period now for some months where they haven't raised rates at several meetings, and we think the circumstances are in place where they can continue on their path back to a normal policy rate which is still quite a bit higher than where they are now," Jarrett told CTV.ca from Paris.
Jarrett said the sooner the increase happens the better, but he doesn't expect it to take place until July.
The report's economic forecast summary for Canada says the economy "rebounded vigorously" over the winter due to strong external demand and healthy investment levels as outsiders looked to invest in the relative stability of the Canadian economy.
But that growth is expected to "moderate somewhat" over the near term due to economic fallout from the Japanese earthquake and tsunami, reduced spending by debt-ridden households and softening in the housing market.
However, the downward trend will be followed by a period of growth as unemployment recedes and the global economy emerges from the aftermath of the recession, the report predicts.
"Rising corporate profits and improving credit conditions should buttress robust business capital spending as a key driver of growth," the report states.
The OECD also warns that Canada needs to keep an eye on debt, both on a federal and provincial level.
"Federal and provincial governments should implement consolidation plans, largely through expenditure restraint, to reduce structural deficits and restore public-debt sustainability," the report states.
Jarrett said Canada's debt issues are much less worrisome than those of the U.S. and he called the report "cautionary and optimistic."
He said the federal government is on track to return to balanced budgets by the 2014 or 2015 fiscal year, as outlined by Finance Minister Jim Flaherty.
"We are confident that assuming there is no relapse into global recession that they can meet that goal," said Jarrett, who is Canadian.
However he said some provinces, such as Ontario and some in the Atlantic region, must closely monitor their debt levels and consider short-term belt-tightening in order to avoid long-term pain.
Jarrett said there are major challenges ahead for the Canadian economy as well as the world economy -- but with careful fiscal planning and restraint, both should have little trouble riding out the storm.
"There is a series of headwinds as we would put it that the global economy is going to have to endure in the coming 18 months. We think it can endure those headwinds and still perform reasonably well."
OECD Secretary-General Angel Gurría said those headwinds include Japan's disaster recovery, U.S. economic fragility, increases to oil and commodity prices and a stronger-than-projected slowdown in China.
The top challenge, she said, is widespread unemployment which affects more than 50 million people in the OECD area.
"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," Gurría said in a statement.
"There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies."
