The fall in oil prices already has an impact on the value of the Canadian dollar, but can it also have an impact on the long term views of the Bank of Canada?
The team at PIMCO explains:
Here is their view, courtesy of eFXnews:
PIMCO’s head of Canadian portfolio management Ed Devlin told MNI Monday that while he currently expects the Bank of Canada to hike its policy rates in the second half of 2015, such a move could be delayed should oil prices remain low for a prolonged period of time.
When the central bank starts tightening will depend on oil prices and the pace of the economic recovery, and its action could be delayed until early 2016.
“If we experience a prolonged period of low oil prices, it will delay a rate hike by the BOC,” Devlin said.
While lower oil prices benefit the consumer, it takes a bite out of the country’s revenues.
“At the margin, falling oil prices are negative for economic growth in Canada,” Devlin said.
“That said, the current fall in general oil prices is somewhat offset by the drop in the discount that Canada sells its oil (the spread between Western Canadian Select and WTI/Brent has dropped more than $20),” he added. “This means that ‘tax cut’ to consumers in Central and Eastern Canada is greater than the drop in revenue experienced by Western producers.”
When PIMCO conducts its cyclical economic forum next week and revises GDP growth forecasts, “oil prices will be a prominent topic,” Devlin told MNI.
What the net effect of lower oil prices on economic growth and inflation will be, and how their decline will play out against other forces, global and domestic, also is a question that international organizations are looking at.
How it will ultimately impact the BOC’s response is a key question for Canada as oil prices remained on a downward path Monday.
The central bank will announce its next interest rate decision Wednesday, and is widely expected to maintain its overnight policy rate at 1.0%, where it has been since September 2010.
Analysts, however, will be looking at the policy statement for indications on whether the central bank acknowledges that prolonged low oil prices could impact the course of its policy, especially after the OPEC’s decision last Thursday to leave its production unchanged at 30 million barrels a day.
At the OECD, Chief Economist Catherine Mann told reporters last week that it would be “unlikely” for the BOC to “move in light of where oil prices are and the potential hit to the economy that will be associated with this period of low oil prices.
The OECD, which expects the Federal Reserve to start hiking its rates in mid-2015, estimates that whether Canada follows if the Fed hikes rates by 25 basis points, depends on where oil prices will be “at the time.”
At the International Monetary Fund, assumptions for oil prices will be revised down when the organization revisits its growth estimates for Canada. But the outcome might not necessarily be a lower GDP estimate.
A key reason is the importance of growth in the United States, Canada’s dominant trading partner, which was revised up in the third quarter, and which will weigh in the balance along with developments in emerging markets and Europe, IMF Mission Chief to Canada, Hamid Faruqee, said in a press briefing last week.
Canada’s GDP in the third quarter ALSO proved stronger than expected by economists, with an annualized pace of 2.8%.
In its WEO in October, the IMF projected 2.3% real GDP growth in Canada this year, accelerating to 2.4% in 2015.
The IMF’s forecasts echo those of the BOC, while the OECD is more optimistic for 2015, as it expects +2.6%, the same as the government’s assumption in the latest fiscal update.
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