Mr. Speaker, maintaining a stable environment for the prices Canadians pay is the paramount objective in Canada’s monetary policy. The Bank of Canada’s renewed framework will keep it focused on delivering low, stable, and predictable inflation in Canada.
To do so, the bank raises or lowers its key policy rate to bring economic activity in line with the productive capacity of the economy and achieve its inflation target. Upon reaching the inflation target and the balance between aggregate demand and the economy’s productive capacity, the interest rate usually settles around what central bankers call the “neutral rate of interest”. This neutral rate is changing over time and has declined over the past two decades as a result of low inflation. For Canada, the Bank of Canada estimates currently that this neutral rate lies between 1.75% and 2.75%, with a midpoint of 2.25%.
The Department of Finance surveys private sector economists on their views on the outlook for the Canadian economy when preparing economic and fiscal projections. The average of private sector economic forecasts has been used as the basis for fiscal planning since budget 1994. This practice introduces an element of independence into the fiscal forecast and has been supported by international organizations such as the IMF.
According to the latest average economic forecast presented in the December 2021 economic and fiscal update, inflation is expected to return within the 1% to 3% inflation control range of the Bank of Canada by 2023 and to have essentially returned to the 2% inflation target by 2024. The interest rate on the three-month treasury bill is also expected to return to 2%, a level consistent with the Bank of Canada’s policy interest rate having returned to the neutral interest rate. As a result, our public debt charges are projected to increase from about 1% of GDP, in financial year 2021-22, to 1.3% of GDP in financial year 2026-27. This remains a historically low level, and well below the pre-financial crisis level of 2.1% in 2007-08, despite extraordinary spending due to the pandemic.