Stephen Jaffe, IMF) EDITORIAL USE ONLY, Associated Press
In this photo released by the International Monetary Fund, IMF Managing Director Christine Lagarde, second right, speaks as other panelists, German Finance Minister Wolfgang Schauble, second left, Citigroup Global Banking Vice Chairman Peter Orszag, left, and India's Finance Ministry Chief Economic Advisor Raghuram Rajan, right, listen to her during the filming of the BBC World Debate "Rescuing the Global Economy: What next?" at the annual IMF and World Bank meetings in Tokyo Friday, Oct. 12, 2012.

OTTAWA — Canada's central bank is expected to raise interest rates in the second half of next year, the International Monetary Fund said, which is sooner than bond investors and some domestic economists predict.

The Bank of Canada's current 1 percent benchmark overnight lending rate is "appropriate" to deal with risks of weak global demand, "with gradual tightening expected to begin in the second half of 2014," the Washington-based fund said in its World Economic Outlook on Tuesday.

Senior Deputy Governor Tiff Macklem said last week a shift in the drivers of growth to business investment and exports from consumption is "elusive," and cut the bank's growth forecast for the second half of this year. Scotiabank vice-president of economics Derek Holt said those comments suggest borrowing costs may not rise until 2016 while trading in overnight index swaps show investors are pricing less than a 50 percent chance of a rate increase by December 2014.

The IMF forecast on Tuesday pared growth for all of this year to 1.6 percent from a July forecast of 1.7 percent, and kept a prediction for next year at 2.2 percent. Canadian governments should tighten fiscal policy as the economy grows, with provinces needing to pare debts "to rebuild fiscal space against future shocks," the IMF said in its report.

"In Canada, growth will pick up as export recovery and stronger business investment offset the slowdown in the housing market and the deceleration in private consumption growth," according to the report. Consumer spending and housing have driven the world's 11th largest economy since the 2008 global financial crisis.