Bank of Canada Is Expected to Keep Interest Rates on Hold Amid Lower Crude-Oil Prices

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01/08/2019 | 07:01 pm

By Kim Mackrael

OTTAWA -- The Bank of Canada is widely expected to keep its benchmark overnight interest rate on hold at a policy announcement Wednesday, giving officials more time to monitor the impact of low oil prices and financial-market turbulence on the Canadian economy.

Economists from all 11 primary dealers of Canadian government securities told The Wall Street Journal they anticipate that the Bank of Canada will keep its key rate at 1.75%. A majority expect the central bank to wait until at least the second quarter before raising the rate again.

On average, those surveyed anticipate a total of two rate increases this year. Financial markets, however, don't currently anticipate any rate increase this year, based on trading of overnight-index swaps, reflecting a view among traders that weaker global growth could throw the central bank off its plans to tighten monetary policy.

The Bank of Canada said in December that the Canadian economy is operating close to its capacity, with unemployment at its lowest level in decades and inflation on target. The central bank has warned, however, that these are the circumstances when inflation pressures typically start to build.

"There's no reason for the Bank of Canada to hurry and raise rates right now," said Desjardins Securities economist Mathieu D'Anjou, whose firm anticipates a single rate increase in 2019, likely around the middle of the year. "They have the opportunity to wait and see what will happen."

Mr. D'Anjou said he expects oil prices will be a significant factor in this week's rate decision, given that energy is Canada's top export.

Heavy oil from the Canadian province of Alberta was trading late last year at a large discount to West Texas Intermediate, the U.S. benchmark, in part because of backlogs caused by a lack of pipeline capacity. That pricing gap narrowed after the provincial Alberta government mandated production cuts of roughly 9%, or 325,000 barrels a day, but the lower production is expected to weigh on Canada's economic output during the first quarter of this year.

At the same time, global oil prices are now roughly $20 a barrel lower than they were during the central bank's last forecast in October, adding to uncertainty for Canada's energy sector. The central bank has expressed concern that low oil prices could lead firms to lay off workers and curb investment plans.

"It is already clear that a painful adjustment is developing for western Canada, and there will be a meaningful impact on the Canadian macroeconomy," Bank of Canada Gov. Stephen Poloz said in early December.

Canada's central bank has lifted its key rate, the benchmark overnight interest rate, five times since mid-2017 to its current level of 1.75%. The central bank has said the key rate will have to rise to a so-called neutral range, currently estimated between 2.5% to 3.5%, to keep inflation in check.

Instability in financial markets and worries about the possibility of a global economic slowdown give the Bank of Canada another reason to stand pat this week, said BMO Capital Markets Chief Economist Doug Porter. Recent data also indicate that annual inflation in Canada has slowed sharply to below the 2% level that the central bank targets with its rate policy.

There is also evidence that interest-rate sensitive parts of the Canadian economy, such as automotive and home sales, are starting to slow because past rate increases are beginning to work their way into the system, he said.

BMO anticipates two rate rises this year, with one in the second quarter and another coming late in the third quarter -- although Mr. Porter said the forecast is far from certain. "I could easily see a situation where the bank sits on its hands this year."

Write to Kim Mackrael at

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