Bank of Canada Photo: D.Neuman/Flickr

The Bank of Canada may need to increase its famously low 1 per cent prime lending rate by late 2014, according to a report released this week by the Organization for Economic Cooperation and Development (OECD). (Tweet this)

In its November 2013 Economic Outlook, the OECD projected that the first rate increase should occur in the fourth quarter of 2014 with the rate continuing to rise steadily to 2.25 per cent by the end of 2015.

Low mortgage rates and record high levels of household indebtedness have the OECD concerned about Canada’s overall economic health. An increase to the prime lending rate, which the organization characterized as “highly accommodative” at its current level, would help promote financial stability and stave off inflationary pressures.

While the Paris-based think tank said Canadian economic growth would strengthen through 2014 and 2015, it would be led by exports and business investment, not the residential housing market which is expected to weaken as the “housing stock seems greater than underlying demand.”

The report said that a decline in residential construction is likely to occur as the market works off excess supply. In a chart that accompanied the report, the OECD also said homes in Canada are overvalued on the basis of price-to-rent and price-to-income, but are still rising.

On the same day that the OECD published its Economic Outlook, Fitch Ratings released a special report in which it pegged the Canadian housing market as being 21 per cent overvalued. However, the ratings agency said that a soft landing for the housing market was the likely scenario, with prices falling by no more than 10 per cent over the next five years.

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