By Julie Gordon
OTTAWA (Reuters) – Interest rate hikes in the second half of 2022 will dampen the effect of Canada’s planned stimulus spending, leading to lower-than-forecast economic growth in the medium term, the country’s budgetary watchdog said on Thursday.
In a review of Canada’s 2021 budget, Parliamentary Budget Officer Yves Giroux said he now expects interest rates to rise by 50 basis points in 2022 as the Bank of Canada responds to stronger economic activity and higher inflation.
“Higher interest rates will dampen the stimulative impact of Budget 2021 measures. This means that government revenues will not increase to their full extent,” said Yves Giroux, Canada’s Parliamentary Budget Officer, in a statement.
“The cost of servicing the Government’s existing debt will also be higher,” he added.
Canadian Prime Minister Justin Trudeau’s Liberals last month outlined a three-year, C$101.4 billion ($84.1 billion) stimulus plan as part of their first budget in more than two years, saying the expenditure would boost growth sharply in the near-term.
The budget forecasts real GDP growth of 5.8% this year, dropping to 1.8% in 2025. By contrast, the PBO expects real GDP growth of 6.2% in 2021, falling to 1.4% by 2025. The debt-to-GDP ratio in both forecasts is 49.2% by fiscal 2025/26.
($1 = 1.2063 Canadian dollars)
(Reporting by Julie Gordon in Ottawa; Editing by Alistair Bell)
