IMF says Canada's economy to keep growing despite oil drop

OTTAWA (Reuters) - Canada's economy will keep growing this year, despite a sharp drop in oil prices, as a rise in exports to a recovering U.S. market offsets declines in domestic consumption and investment, the International Monetary Fund (IMF) said on Friday.

While the economy has not yet shifted to broad-based recovery, growth is expected to become more balanced this year as the housing market cools, the IMF said.

Still, Canada is a major oil producer and the drop in oil prices will be a drag on growth due to weaker energy sector investment. The IMF forecasts the economy will grow by 2.3 percent this year, slightly below its 2.4 percent forecast for growth in 2014.

"Downside risks to the outlook have risen in light of further oil price declines, adding to the risks of weaker global growth and still-unfolding effects from the unusually large fall in oil prices," the IMF said in its report.

The IMF completed its consultations with Canadian officials on the state of the economy in late January.

The IMF said it supports the Bank of Canada's recent move to lower interest rates, though it encouraged policymakers to continue monitoring the impact of monetary policy on household debt and house prices.

The Bank of Canada unexpectedly cut its benchmark rate last week to 0.75 percent from 1 percent, citing the threat posed by the dramatic drop in oil prices to economic growth and the bank's inflation targets. The bank also cut its forecast for 2015 economic growth to 2.1 percent from 2.4 percent.

The IMF estimated national home prices are overvalued by between 7 and 20 percent with important regional differences. Still, there are some signs of cooling, especially in overheated markets, the IMF said. It added it continues to expect a soft landing for housing.

While measures taken by policymakers have contained the growth of insured mortgages, there has been a "significant rise in uninsured mortgages alongside still-strong segments of housing markets," the IMF said.

Additional policy action may be needed if household balance sheets and housing market vulnerabilities start rising again, the IMF said. It also encouraged more gradual measures to ensure the private sector takes up more of the mortgage risk.

(Reporting by Leah Schnurr; Editing by Chizu Nomiyama; and Peter Galloway)