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Bank of Canada report expected to measure cheap oil’s effect on Canadian economy

With important portions of economy connected to oil patch, the effects of low oil a priority for policy-makers.


October 22, 2014
by The Canadian Press

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OTTAWA—The Bank of Canada’s latest read on the national economy is expected to explore a pressing question: How much are low oil prices affecting the country’s bottom line?

The price of oil recently hit a two-and-a-half year low, a sharp fall that is prompting Canadian policy-makers and the corporate world alike to reflect on the potential risks of lower prices.

The central bank has indicated it would attempt to measure the impact of tumbling prices in its quarterly monetary policy report, scheduled for release.

The assessment will come at a crucial time.

Some economists have warned the federal government will have to weigh potential pitfalls of low oil prices before it makes final decisions on the tax cuts it aims to introduce before next year’s election.

The effect of low oil on the pace of extraction and investment is also on the minds of federal and provincial policy-makers, since important portions of the Canadian economy are connected to activity in the oil patch.

Economists like Jimmy Jean of Desjardins Economic Studies expect the bank’s take on the pros and cons of low oil prices to be a one of the most-closely examined elements in Wednesday’s report.

“Most definitely it’s something that’s going to be watched,” Jean said.

“I’m pretty sure that they’ve tested various assumptions on oil prices and checked what the impact would ultimately be on Canadian growth—what kind of scenario would be highly adverse to the Canadian economy.”

He said the Bank of Canada’s conclusions on the subject will be particularly interesting because of the considerable research resources and models it has at its disposal.

A closer look at the effect of oil prices could also attract the federal government’s attention.

Finance Minister Joe Oliver has maintained the Harper government will live up to its tax-cutting pledges despite the drop in oil prices. The government maintains it will table a surplus in next year’s budget, ahead of the election.

Bank of Canada Governor Stephen Poloz has said it’s not easy to gauge how much the price of oil influences the Canadian economy.

An assessment, he added, would have to factor in a judgment call on how long the trend might last, and weigh all the negative and positive variables.

Poloz noted how lower prices also mean higher disposable income for consumers.

The central bank will also release its latest interest-rate decision Wednesday, but BMO chief economist Douglas Porter said the trend-setting rate is not expected to change, even though the economy has seen better-than-expected domestic growth and an uptick in inflation.

“Those two items as a stand-alone would suggest the bank might be more inclined to raise interest rates, but that’s been washed away by the big drop in oil prices and growing concerns over the global economy,” Porter said of the rate, which hasn’t budged in four years. “I don’t think there’s any debate about what they’re going to do with interest rates.”

Porter said he will also watch how Poloz addresses the issue of core inflation, an index closely followed by the central bank.

He said an earlier central bank projection had core inflation staying below two per cent until the second half of 2016 and then it hit two per cent this year.

“It’ll be interesting to see if they view that as temporary and I suspect they will,” said Porter, who predicted the focus of the bank’s concerns to highlight the ongoing external factors that threaten Canada’s economy.