Federal Public Debt Charges Up $2 Billion With Latest Interest Rate Hike, PBO Estimates

The Bank of Canada is shown in Ottawa in a file photo. (The Canadian Press/Sean Kilpatrick)

Public debt charges jumped nearly $2.3 billion with the latest interest rate hike by Canada’s central bank, according to estimates from a report by the Parliamentary Budget Office (PBO).

In September 2020, the PBO’s “Economic and Fiscal Outlook” forecast that a 1 percentage point increase in interest rate by the Bank of Canada (BoC) would raise public debt charges to $4.5 billion in 2021–22.

On Dec. 7, the central bank raised the rate by half a percentage point, elevating its interbank loan rate to 4.25 percent from its last update at 3.75 percent in October.

The hike marks the seventh consecutive time the bank increased its overnight rate target this year. The interest rate was 0.25 percent last December.

“Growth will essentially stall through the end of this year and the first half of next year,” the BoC said in a statement on Dec. 7.

In 2021, Budget officer Yves Giroux said in testimony before the Commons finance committee that the impact of rising rates on debt charges was simple arithmetic.

“With public debt charges following such a shock of one percentage point, federal debt charges go up by $4.5 billion in the first year and they rise to $12.8 billion additionally by year five if that one-time shock is sustained throughout the period,” said Giroux, as first reported by Blacklock’s Reporter.

‘Future Generation’

In November, the PBO published its “Risk Scenario Analysis” report, predicting that federal debt charges are expected to hit $53 billion by 2024. The debt service ratio, which is public debt charges relative to tax revenues, is projected to reach 14.3 percent in 2024, the report said.

The forecast for public debt charges in 2022–23 amounts to $31.7 billion, according to the report. The projected costs continue to rise to 47.3 billion in 2023–24 before peaking at $53.4 billion in 2024–25.

“Public debt charges are $5.6 billion higher per year, on average, over 2023–24 to 2027–28,” the budget office wrote.

Sen. Donald Plett, opposition leader in the Senate, expressed his concern over the latest decision by the BoC, while at the same time criticizing the policies of the federal government.

“The party is now over,” Plett said in the Senate on Dec. 7. “The Bank of Canada raised interest rates today for the seventh time this year. Sadly, it will be future generations—your grandchildren, my grandchildren, and our great-grandchildren—who will suffer the consequences of your government’s failed economic policies—your government.”

The central bank plans to announce another rate decision on Jan. 25, 2023.

“Looking ahead, we will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” it said in a statement.

“We are resolute in our commitment to achieving the 2 percent inflation target and restoring price stability for Canadians.”