The hit from low oil prices in Western Canada will reverberate across the national economy — but they should have less cross-country bite than the crisis of 2015, the head of the Bank of Canada said Thursday.
The 2015 oil-price crash contributed at the time to a slight, technical recession and prompted the central bank to cut interest rates to boost Canada’s economy — twice.
Even with the latest collapse in oil prices, governor Stephen Poloz insisted Thursday that he expects interest-rate hikes will still be needed over time. The central bank has been gradually raising rates for more than a year, thanks to the stronger economy.
The arrival, however, of future rate increases will likely be more gradual than many observers had predicted just a few days ago. Market watchers, many of whom had expected the bank to increase the rate again in January, are now predicting a slower pace following the concerns expressed by Poloz in recent days regarding recent economic developments.
On Wednesday, the bank left the rate unchanged at 1.75% as it underlined fresh negatives, such as the recent drop in oil prices.
In explaining the rate decision Thursday, Poloz appeared less inclined to make a move any time soon.
“The current level of interest rates remains appropriate for the time being,” Poloz said Thursday in a speech at an event hosted by CFA Society Toronto.
“We continue to judge that the policy interest rate will need to rise… The pace at which this process occurs, of course, will remain decidedly data dependent.”
The bank said Wednesday the timing of future increases will now depend on several factors — the persistence of the crude slump, the ability of corporate investment to pick up its pace and how much room the overall economy still has left to grow without stoking inflation.
The bank raised its key interest rate target at its October meeting — its fifth increase since the summer of 2017.
But much has changed in just six weeks.
In the speech Thursday, Poloz said the data since October has been “on the disappointing side” and that the economy has less momentum heading into the final three months of 2018 than the bank believed it would.
Poloz pointed to an unexpected decline in business investment over the summer as a key development — but he said the dive in oil prices has been the most-important “new shock.”
“It is already clear that a painful adjustment is developing for Western Canada, and there will be a meaningful impact on the Canadian macroeconomy,” he said.
“That said, given the consolidation that has taken place in the energy sector since 2014, the net effects of lower oil prices on the Canadian economy as a whole, dollar for dollar, should be smaller than they were in 2015.”
He said oil and gas production now makes up just 3.5% of Canada’s economy, compared with 6% in 2014. In the years that have followed the last slump, the sector has adjusted its cost structures, wages and employment levels, Poloz said.
Poloz also said that in 2015 about 30% of all business investment in Canada was in the oil and gas sector, while today it’s only around 18%. That means investment had farther to fall a few years ago.
Looking at the positive side, Poloz said the latest oil-price slump has arrived at a time when Canada’s economy is running close to full tilt and the unemployment rate is at a 40-year low.
He added he remains hopeful business investment will rebound now that much of the uncertainty surrounding North American free trade has eased with the new agreement between the United States, Mexico and Canada.
The central bank, he said, will also be watching for signs the economy can still grow without fuelling inflation. Poloz pointed to recent downward revisions to gross domestic product data that suggested there’s still some room for non-inflationary growth.
Moving forward, the bank will scrutinize the results of its quarterly survey of business executives, to be published Dec. 21, for clues on corporate sentiment. Poloz said the bank will also meet with leaders in the energy sector, as it did following the oil-price collapse in late 2014 and early 2015.
In a news conference Thursday following his speech, Poloz was asked about the chances a rate cut could be needed to deal with the latest oil slump.
“I’m just not going to comment on that for now,” he said. “We have to do our work in order to understand the shock better and what its magnitude actually is.”