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article imageOECD warns 'severe recession', urges Canada to hike interest rate

By Andrew Moran     May 22, 2012 in Business
Paris - The Organization for Economic Co-operation and Development (OECD) published its latest report Tuesday, in which it notes of a "severe recession" due to the Eurozone crisis. It also urged Bank of Canada Governor Mark Carney to raise interest rates.
Europe is now facing even more pressure after the OECD issued its latest economic outlook. It urged the eurozone to take the necessary steps to incite economic growth because otherwise it poses a severe risk to the global economy.
In its report, it projected global growth to be at 3.4 percent, but warned of a “severe recession” if actions are not taken. It listed the 17-nation bloc’s weakness in business and housing confidence, tight financial markets and impacts on fiscal consolidation on near-term growth as some of the setbacks it’s experiencing.
Nevertheless, the policy forum noted on the eve of the European Union Summit that global economic growth will be up to 4.2 percent in 2013 and 0.9 percent in the eurozone – only if the nations can control its debt volumes.
“With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence,” said OECD Secretary-General Angel Gurría during the launch of the report in Paris.
The OECD suggested leaders can take five steps to increase growth:
- Improve the European single market.
- Make comprehensive reforms in fields like education, green growth, innovation and competition.
- Utilizing the European Central Bank balance sheets.
- Increasing European Investment Bank funding.
- Enhance the firewall to prevent the infection of the eurozone financial crisis.
“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said OECD Chief Economist Pier Carlo Padoan.
Canada
The Paris-based research group urged Bank of Canada governor Mark Carney to set its benchmark rate at 2.25 percent, which would be up a projected .25 percent by the end of 2013. This would affect nearly everything Canadians pay, such as loans and mortgages.
“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,” stated the OECD in the report. “However, on this projection, further increases towards the neutral rate will also be needed in 2013 to hit the inflation target.”
This isn’t the first time the OECD suggested Canada to raise interest rates. In 2010, it gave the Bank of Canada the same suggestions, but Carney held the rate at one percent since that time. The central bank head has also acknowledged the soaring debt levels in Canada, which amounts to approximately 150 percent of disposable income.
More about OECD, Canada, Interest rates, Eurozone, Mark Carney
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