Budget watchdog expects inflation to fall to 2% by end of year

The parliamentary budget officer is projecting inflation will return to the Bank of Canada's two per cent target by the end of the year and the federal deficit will grow amid weakening economic conditions.

The budget watchdog released the latest economic and fiscal outlook Tuesday. It predicts the central bank could begin cutting interest rates in April.

High interest rates have weighed on the Canadian economy as consumers pull back on spending and businesses see their sales slow.

The PBO says the economy is expected to grow by a modest 0.8 per cent this year, slightly lower than the Bank of Canada's projection of one per cent.

Meagre economic growth is expected to weigh on government coffers as well.

The PBO expects the federal deficit to grow to $46.8 billion for the current fiscal year, provided no new measures are introduced and existing temporary measures expire as scheduled.

That would exceed the federal government's fall projection of $40 billion.

The report warns that if the Bank of Canada keeps interest rates higher for longer than expected, the deficit could be even higher and the economy weaker.

Finance Minister Chrystia Freeland announced Monday that she will present the federal budget, which will offer an update on the state of federal finances, on April 16.