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The cuts in oil prices will make a bad situation worse in Canada. The Bank of Canada (BoC) is already preoccupied with downside risks, and strategists at TD Securities are assessing an inter-meeting cut or a larger response at the April rate announcement.

Key quotes

“WTI has dropped by another 30%, and a simple rule of thumb suggests that the last three trading days of price action is consistent with a 0.3 p.p. hit to the level of GDP in Canada.” 

“Under normal circumstances, such a move would argue for 25 bps in BoC cuts. Looking at this move in the current context, it probably calls for another 50 bps in stimulus in short order.” 

“The BoC is also going to be especially sensitive to market signals in this environment, and markets are currently priced for an inter-meeting cut. If the Fed is forced to cut rates inter-meeting we expect the BoC to join, and we will be closely watching to see if the BoC moves rates alongside the Fed on March 18th.” 

“We now look for WTI prices to hold between $32-34 though Q3, with the drag to yearago inflation from gasoline and other energy products peaking at 1.0% in May (energy products make up just 6.5% of the basket). We look for inflation to hold below target for most of 2020, before drifting back above 2% in Q1 2021.”

 

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