OTTAWA (Reuters) - The International Monetary Fund (IMF) said on Monday that while Canada's economy has performed well, it faces significant risks including trade tensions and a potential hit to competitiveness from lower U.S. corporate taxes.
In the preliminary findings of its annual review of the Canadian economy, the IMF said that interest rates should be raised only gradually, even as inflationary pressures are building and that the Bank of Canada's approach appears to be broadly appropriate.
The Bank of Canada has raised rates three times since July 2017 and there are growing expectations that the central bank will hike again this July.
Canada's once-hot housing market is showing signs of cooling in the wake of higher borrowing costs and a number of policy measures, which has helped moderate a key domestic risk, the IMF said.
"However, economic anxiety is high due to trade tensions, uncertainty about the outcome of NAFTA negotiations, and the impact of the U.S. Tax Cuts and Jobs Act on Canada's medium-term competitiveness," the IMF said in a statement.
Economic growth is expected to slow to 2.1 percent this year after racking up a 3 percent pace last year, the highest growth rate among its Group of Seven peers, the IMF said.
Canada should be supported in the short-term by higher oil prices and strong U.S. growth that should bolster exports.
Still, there is "considerable" uncertainty over what impact U.S. tax reform will have on Canada, which could make Canada a less attractive place for investment in the medium-term, the IMF said.
As well, the prolonged renegotiation of the North American Free Trade Agreement (NAFTA) could dampen investment. If NAFTA talks fail and tariffs revert to World Trade Organization rules, Canada's long-run economic growth could be 0.4 percent lower than it would be otherwise, the IMF said.
The economy is also still vulnerable to a sharp correction in the housing market as the banking sector is heavily exposed to household debt, the statement said.
(Reporting by Leah Schnurr; Editing by Sandra Maler)