* Authorities should be prepared if risks materialize
* IMF says risks to Canada’s outlook have increased
* Risks include high household debt, U.S. housing market
* Welcomes recent flexibility on fiscal stimulus exit
* Says Bank of Canada pause reflects need to balance risks
By Jeffrey Hodgson
TORONTO, Oct 28 (Reuters) - The Canadian government and the Bank of Canada should be ready to provide more stimulus to the economy if the downside risks it now faces come to pass, the International Monetary Fund said on Thursday.
The multinational agency said authorities were taking the right steps by winding down Canada’s fiscal stimulus plan and halting an interest rate hike campaign started in June.
But the IMF warned risks to the economic outlook have increased -- including the high debt of Canadian households and the impact of housing market weakness in the United States.
“Macroeconomic policy settings are appropriate for what we’re seeing now, (but) there are a lot of risks out there and there a lot of risks to the downside,” Charles Kramer, the IMF’s mission chief for Canada, told a media briefing in Toronto.
“The question is what policies can do by way of doing more if it’s necessary. And actually they have a lot of room by international comparison ... low net debt, a lot fiscal room if it became necessary. It’s not necessary now.”
Kramer said there is a risk that Canadian households with high debt levels could get squeezed as borrowing costs eventually rise. High debt levels might also dampen consumer spending going forward, which would drag on economic growth.
The IMF noted Canada rapidly emerged from the financial crisis, but that pace of the expansion has slowed in recent months as global demand slowed and the Canadian dollar appreciated.
Given this, the agency said Canada will need to strike a balance in setting its budget. It said it is appropriate the government is winding down its stimulus policy and aiming for a balanced budget over the medium term.
But it also welcomed Ottawa’s decision to be flexible on deadlines for unfinished infrastructure projects and to limit employment insurance premium increases.
“That’s helpful. But, more generally, we see them as having a very sensible and credible fiscal plan to stabilize debt over the medium term,” he said.
Canada predicted earlier this month that it will balance its budget by the 2015-16 fiscal year after posting a record deficit for 2009-10. [ID:nN12187547]
On monetary policy, the IMF said the Bank of Canada’s recent decision to hold its main policy rate at 1 percent struck the right balance between risks to the outlook and the economy’s “relatively advanced expansion”. The central bank had hiked rates three times starting in June.
The bank said last week it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth. [ID:nN27276109]
Further out, the IMF said restraining growth in health care spending will be an essential part of ensuring fiscal stability. (Editing by Rob Wilson)