Key interest rate will likely rise again in April: PBO

Key interest rate will likely rise again in April: PBO - image

There was a mixture of good and bad news on Tuesday morning from Canada’s parliamentary fiscal watchdog. The federal deficit is projected to be slightly lower than expected this year but economic growth is still slowing and the Bank of Canada will probably bump up its policy interest rate once again in April.

In its latest Economic and Fiscal Monitor report, the Parliamentary Budget Officer (PBO) is projecting that Canada’s gross domestic product will grow by 2.9 per cent for 2017, which is 0.1 percentage points lower than it projected last fall.

The culprit, according to Tuesday’s report, is “historical revisions” and “weaker than expected” growth in the third quarter of 2017.

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“The Canadian economy has slowed markedly in the second half of 2017, averaging 1.8 per cent growth, compared to real GDP growth of 4 per cent in the first half,” the report notes.

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“The sharp slowdown in growth in the third quarter was primarily due to a contraction in exports. Although we anticipate a rebound in exports, the recent pace of growth is expected to continue into the fourth quarter, reflecting offsetting contributions from a pullback in household spending and a contraction in residential investment.”

READ MORE: Staggering share of Canadians fear bankruptcy if interest rates rise much more

Then comes the projection that will catch the attention of most homeowners and consumers:

“We continue to expect that the Bank of Canada will again raise its policy interest rate by 25 basis points in April,” the PBO says.

That will bring the key interest rate to 1.5 per cent, up from the current 1.25 per cent.

READ MORE: Bank of Canada raises key interest rate to 1.25%

The PBO is also now projecting a deficit of $18.5 billion (0.9 per cent of Canada’s GDP) for this fiscal year.

That’s $1.8 billion less than the estimate in October, and the watchdog says this is mainly due to a decrease in estimated spending (about $2.2 billion less than anticipated) and a $0.5-billion increase in estimated revenues.

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“Program expenses are expected to be lower due to lower Employment Insurance benefits and slower-than-anticipated growth in direct program spending,” the report explains, adding that the government’s ongoing struggle to get infrastructure investment out the door is also contributing.

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“Part of the lower profile for program spending is due to infrastructure spending. We expect slightly higher federal infrastructure lapses than we estimated in (October).”

Key interest rate will likely rise again in April: PBO - image

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