Canada’s central bank should move its benchmark target for the overnight rate above its current one per cent level or risk unsustainable increases in the country’s inflation rate and real estate market, the Organization for Economic Co-operation and Development said today.

The bank has held the rate steady at one per cent for the last 13 consecutive policy meetings, dating back to September 2010, the longest the bank has held steady since the 1950s.

“It is assumed here that the first policy rate increase will be implemented in autumn 2012, which is a few months ahead of market expectations,” the OECD said Tuesday.

‘People should think twice about continuing to leverage up in order to buy more house than maybe they really need’—OECD economist Peter Jarrett

The OECD made a similar suggestion to Canada’s central bank a year ago, and was ignored. The U.S. Federal Reserve has already publicly pledged to keep America’s benchmark rate at effectively zero until 2014 at the earliest.

“Further increases … will also be needed in 2013,” Tuesday’s OECD report added, noting it hopes the rate will be at 2.25 per cent by the end of 2013.

Bank of Canada governor Mark Carney, Finance Minister Jim Flaherty and other policymakers have warned Canadians to get their financial houses in order in advance of rising rates for a year. The federal government has tightening mortgage lending rules for CMHC-insured mortgages, but thus far Canada’s central bank has had its hands tied in terms of raising rates.

Beyond words, a modest interest rate hike could be necessary to slow the trend of rising debt loads, OECD’s senior economist Peter Jarrett said. “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.”

The posted rate for a variable rate mortgage at Canada’s big banks stands at prime plus 0.2 percentage points, or roughly 3.2 per cent.

“If rates go up something like we are suggesting then mortgage rates will be in more like the five per cent range,” Jarrett said.

With files from The Canadian Press

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