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OECD Calls on BoC to Raise Rates

23 May 2012

Many analysts and experts in Canada think it’s time that the Bank of Canada raised their rates and now, there’s one more body that thinks so: the Organization for Economic Co-operation and Development (OECD.) One senior economist in this organization says that the rule changes that have been implemented thus far aren’t enough for some of Canada’s hottest markets; and that the BoC is going to have to raise their rates if they want to see real change in consumer’s and homeowner’s borrowing habits.

Peter Jarrett, OECD senior economist, says that while the changes to HELOCs and amortizations have been enough to slow borrowing and keep people from getting in over their heads within the cooler markets in Canada, these measures simply aren’t enough for those that are still taking on huge Toronto mortgages. Toronto has been one of the hottest markets in Canada for the past six decades, but it’s the overvaluation happening within the city that has many, including Mr. Jarrett, worried about the amount of debt residents in this market are still taking on.

“The risks are that people put too many eggs in one basket,” he said on Tuesday, when speaking about how the federal government needs to raise interest rates. “If rates go up something like we are suggesting then mortgage rates will be in more like the five per cent range.”

Those rates that the OECD are suggesting are rates of 2.25% that they would like to see implemented by the end of next year. If the interest rates were to go up that high, it would only be one per cent higher than what the rate has been since September of 2010.

“We feel that at least in the hottest real estate markets, particularly Toronto, that that would be a good signal that people should think twice about continuing to leverage up in order to buy more house than maybe they really need,” he continued on.

The OECD made the same kind of recommendations last year, just as the European sovereign debt crisis hit. Reacting to the global conditions, the Bank of Canada kept its prime lending rate at the historical lows Canadians had become so dependent on. Now, Mr. Jarrett says, as long as things continue to hold steady within Europe, there’s no reason that interest rates shouldn’t rise.

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