Alberta’s oil woes might mean an interest rate hike.
Economists, investors have second thoughts
OTTAWA • Cheap Alberta oil is giving economists second thoughts about the next Bank of Canada interest rate increase.
Considered a sure thing only a couple of weeks ago, doubts are beginning to emerge about whether the central bank will hike in January without a rebound in slumping prices for Canadian heavy crude. In reports over the past 24 hours, Toronto-Dominion Bank and Bank of Montreal have put asterisks on their calls for a move, while swaps trading suggests investors are also paring bets.
Should weakness persist, “we would expect the Bank of Canada to hold off on raising its policy interest rate until there is further stabilization in oil prices,” TD economists Omar Abdelrahman and Brian DePratto wrote Friday.
Western Canada Select — the main blend sold by the oilsands — closed at US$13.46 a barrel on Nov. 15, the lowest in Bloomberg data stretching back to 2008. Its discount to U.S. benchmark crude exploded to as much as US$52.40 a barrel last month, also a record.
Bank of Canada Governor Stephen Poloz has increased the policy rate five times since mid-2017, amid a strong economy.
DePratto said by phone that Poloz will have to “acknowledge” the strains on the industry at the central bank’s next rate decision on Dec. 5. Despite the caution, TD is anticipating oil prices will recover and the Bank of Canada will raise rates in January.
Canada’s heavy crude discount could narrow to around US$20 a barrel over the next few quarters as temporary supply problems fade, DePratto said in his note. That would allow the Bank of Canada to focus on strength outside the energy industry that has pushed inflation above its two-per-cent target.
BMO chief economist Doug Porter said he would consider cancelling a call for a January hike if Canadian oil discounts persist, adding some investors are underestimating the risks. “The spread is so extreme, the cries of pain from Alberta are so loud, I don’t think they can just put blinders on and carry on as if nothing’s changed,” Porter said Thursday.
Others remain confident there is a strong case for tighter policy in January. Energy is a smaller share of the economy than in 2015 when a bigger crash led to rate cuts, and the central bank’s favoured survey of business conditions signals healthy growth, according to RBC economist Josh Nye.
“The focus is going to remain on the national picture, but it’s a tough balancing act when some provinces aren’t doing as well,” Nye said Thursday.