In a paper for the C.D. Howe Institute, economist Paul Masson argued in May that the Bank of Canada should nudge rates higher to forestall real-estate bubbles, excessive household debt, pension-fund woes and other dangers.
But a May 31 briefing note requested by Stephen Harper's office on the controversial paper notes that Masson's arguments are "at odds" with the views of most economists.
And it says the central bank cannot act as if Canada is an island while the United States, Europe, Japan and England continue to hold rates down to help prime their anaemic economies.
The note, signed by the clerk of the Privy Council, advises Harper that the costs of raising Canada's interest rates would outweigh the benefits.
A heavily censored copy of the document was obtained by The Canadian Press under the Access to Information Act.
"The (C.D. Howe) report has captured some attention in the media, as the call for raising interest rates immediately stands at odds with the views of most economists and market players," says the five-page analysis.
"The costs of raising interest rates well ahead of other major economies would likely outweigh the benefits."
Harper, who has a master's degree in economics from the University of Calgary, is frequently briefed on think-tank publications focusing on the economy.
Masson is a widely respected economist, employed at various times by the Bank of Canada, the Organization for Economic Co-operation and Development, the International Monetary Fund and elsewhere. He was special adviser to Canada's central bank in 2007-2008.
Now a research fellow at Toronto's Rotman School of Management, Masson argued in his May 15 paper that Canada's economy suffered less of a downturn than did other industrial nations after the 2008-09 meltdown, and low rates are now harming rather than helping.
"Short-term rates are ... too low in Canada, a situation that is starting to build in pervasive problems for the economy," he wrote.
"Below-equilibrium interest rates for an extended period distort investment decisions, leading to excessive risk taking and inefficient and ultimately unprofitable investments.
"They also encourage the formation of asset bubbles whose collapse could lead to a recurrence of the recent financial crisis."
Key sections of the Harper briefing note are censored under provisions of the Access to Information Act that protect advice given to ministers.
The note also highlights a May 29 announcement by the Bank of Canada that low rates will remain in place with the continued slack in the economy and low inflation, suggesting Masson's view is an outlier.
Masson says the briefing note does not rebut his main arguments, merely asserts that Canada will suffer consequences if the Bank of Canada goes alone in raising rates.
And he says that since his article appeared, "financial markets seem to be agreeing with me, pushing up interest rates on traded securities, and the banks have also raised their mortgage rates."
"Central banks may be led to raise rates earlier than was thought likely, especially if the good economic news coming out of the U.S. persists," Masson said in an email.
The Bank of Canada is set to announce its next policy interest rate on Wednesday.
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