Canada budget office sees rates on hold until mid-2015

Mon Apr 29, 2013 12:10pm EDT
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* Budget office sees economy below potential through 2015

* Sees bigger budget surplus than government does in 2015-16

OTTAWA, April 29 (Reuters) - Canada's parliamentary budget office (PBO) sees the country's central bank holding its key interest rate at the current 1 percent until the second quarter of 2015 as slow global recovery and Ottawa's spending restraint drag on economic growth.

In its twice-yearly economic and fiscal outlook released on Monday, the PBO was more upbeat than the Conservative government on a return to surplus in the federal budget despite the sluggish growth. It predicted surpluses that were on average C$2.5 billion ($2.5 billion) higher than the government's forecasts, reflecting higher revenue projections.

The report's forecast of 1.5 percent economic growth in 2013 matches that of the Bank of Canada. The central bank said earlier this month the economy will likely reach full capacity and inflation will hit its 2 percent target by mid-2015.

By contrast, the PBO sees the economy "well below its potential GDP through 2015 and, as a result, the unemployment rate remains relatively stable, averaging 7.3 percent over 2013 to 2015."

"Consequently, PBO expects the Bank of Canada to maintain its policy interest rate at 1 percent until the second quarter of 2015 before gradually, but steadily, raising its policy rate," it said.

The PBO's assessment is based on its own economic outlook derived from partial information from the finance ministry, rather than any direct knowledge of monetary policy intentions.

The central bank has said it will probably raise rates after an unspecified "period of time," even as it acknowledges that the economy is expanding more slowly than it had forecast previously.   Continued...