Continued weakness in oil prices would weigh on the Canadian dollar, domestic equity markets, and the prospect for higher interest rates in 2015, BMO economists say in a report published Tuesday.
The report says that while current prices are below fundamental value, and won’t be sustained in the long run, “there is clearly a risk that low prices could persist for at least a few quarters given the supply glut and softer global outlook.”
There are mixed implications for the Canadian economy and financial markets should oil prices continue to hover near US$60. For the economy overall, the report says that sustained lower oil prices would cut 2015 Canadian GDP by less than 0.4 percentage points. The more significant effect would be in shifting of the internal growth picture, with energy-driven provinces suffering and more manufacturing-dependent provinces benefiting.
“Perhaps the most clear-cut loser from weaker oil prices on the domestic front is the Canadian dollar,” the report says, noting that the weaker dollar is still slightly above fair value based on current commodity prices. “Further weakness in crude would drag the loonie along for the ride,” it says.
Furthermore, lower oil prices are also “a clear negative for the TSX, in absolute terms and relative to its S&P 500 counterpart,” it says. “Canadian equity market underperformance will likely continue until oil prices can regain some momentum.”
Finally, it says that lower oil prices could further delay Bank of Canada rate hikes. “Our view, even before the recent financial market volatility, was that the Bank would wait until late 2015 before beginning to hike rates. While there’s plenty of water to go under the bridge by then, a sustained decline in oil prices would threaten to further delay potential rate hikes, even with the Fed moving around mid-2015,” it says.