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In November, consumer prices were spot on the 2% target, but weak oil prices — and the knock-on effect on gasoline prices — could push inflation to around 1%.

“We didn’t really expect interest rates to change for at least the next 12 months anyway. We certainly didn’t buy into the idea that they would be going up as early as August or something this year,” said Paul Ashworth, chief North American economist at Capital Economics.

“So, the drop in oil prices, if it keeps going, would support that view,” he said.

“I think Canadian growth is not going to be very good at all. Even if it holds up in 2015, definitely 2016 is going to be pretty bleak — particularly if oil prices stay where they are.”

The uncertainty over GDP growth has also thrown into question the timing of the Conservatives’ target of balancing its budget in 2015 — a pledge the federal government wants to take into the election campaign, set for October.

But crumbling oil prices have made that balancing act less doable with only a slight surplus remaining as Ottawa prepares for its spring 2015-16 fiscal budget.

“I am a little bit surprised about how far out on a limb they’re going — how strong their statements are on that front. Because there are no guarantees with the economy — unless they know of some revenue source that I’m unaware of,” said Douglas Porter, chief economist at BMO Capital Markets.

“There is a lot of flexibility in government finances. They can arrange the spending from year to year. But I think it’s becoming a bigger challenge by the day to balance the books in 2015.”

Mr. Ashworth, at Capital Economics, said “if you think about this from the angle of politics, of course, balancing the budget is somehow seen as virtuous and allowing you to put through tax cuts.”

“But as far as the economics goes, if you’ve got an economy that is really struggling because you’re a net exporter of oil and the oil price just collapsed and you have an overvalued housing market where house prices start to go down, the last thing you should be worried about is sticking to your pledges to balance the budget.”

Financial Post

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