Alberta Oil Woes Could Put Poloz January Rate Hike in Jeopardy
Cheap Alberta oil is giving economists second thoughts about the next Bank of Canada rate increase.
(Bloomberg) -- Cheap Alberta oil is giving economists second thoughts about the next Bank of Canada rate increase.
Considered a sure thing only a couple of weeks, 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,” Toronto-Dominion Bank economists Omar Abdelrahman and Brian DePratto wrote in a research note Friday.
Western Canada Select crude -- the main blend sold by the nation’s oil sands -- closed at $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 $52.40 a barrel last month, also a record.
All but one of 14 economists recently surveyed by Bloomberg News expect a rate increase in the first three months of next year. Odds for a hike by January have fallen to about three-quarters, from being fully priced in earlier this month, swaps trading suggests.
Bank of Canada Governor Stephen Poloz has increased the policy rate five times since mid-2017, most recently with an October move, amid a strong economy.
Oil Recovery
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, which will be followed by a speech from the governor the next day in Toronto. 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 $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 2 percent target.
Bank of Montreal’s chief economist, Doug Porter, said he would consider canceling 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 no thing’s changed,” Porter said by phone from Toronto on Thursday.
Others remain confident there is a strong case for tighter policy in January even with the weakness in oil prices. Energy is a smaller share of the economy than in 2015 when a bigger crash led to rate cuts, and the central bank’s favored survey of business conditions signals healthy growth, according to Josh Nye, an economist at Royal Bank of Canada.
“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 by phone.
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier
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