UPDATE 2-Bank of Canada: cheap oil bad but effect not drastic

Tue Jan 13, 2015 3:45pm EST
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(Adds remark on oil price effect on growth not being drastic, analyst quote on implication for interest rates)

By Brendan O'Brien

MADISON, Wisconsin Jan 13 (Reuters) - The collapse in crude oil prices may delay the Canadian economy's return to its production potential but is unlikely to have a drastic effect on growth, Bank of Canada Deputy Governor Timothy Lane said on Tuesday.

While he stopped short of saying crude's plunge could delay interest rates hikes, Lane made clear the central bank's view that cheap oil was bad for the economy despite mitigating factors.

Any Canadian gains from lower prices for consumers and stronger global growth would be more than reversed over time as the impact of lower oil industry incomes spreads through the economy.

"We see important risks to Canada's economic outlook stemming from the recent decline in the price of oil and other commodities," Lane said in a speech to a business group.

Pressed in a question-and-answer session afterwards, he noted that Bank of Canada Governor Stephen Poloz had estimated in December that cheap oil would take 1/3 of a percentage point off growth this year.

The bank has been working further on quantifying the countervailing effects, and will also take into account a further $20 a barrel fall in oil, when it puts out its quarterly Monetary Policy Report next week.

Lane declined to give a number but said "we're not thinking of something that's drastic."   Continued...