Canadian dollar's slide may forestall Bank of Canada rate cut

Fri Dec 18, 2015 2:04pm EST
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By Fergal Smith

TORONTO Dec 18 (Reuters) - Pressure on the Bank of Canada to ease rates further in response to low oil prices may have diminished because of the weakness of the Canadian dollar and the strengthening U.S. economy, economists said.

The loonie, as Canada's currency is colloquially known, fell to below 72 U.S. cents, a more-than-11 year low, after the U.S. Federal Reserve began its tightening cycle on Wednesday confident that the U.S. recovery will continue.

That compares with a 76 U.S. cents rate assumed by the Bank of Canada when it last updated its forecasts in October and 80 U.S. cents assumed in July, providing additional stimulus for the manufacturing and export sectors.

"I am not in the camp that thinks that they are going to have to cut interest rates," said David Rosenberg, chief economist & strategist at Gluskin Sheff & Associates. "The currency is doing a lot of the heavy lifting."

The drop in U.S. crude oil to $35 a barrel leaves it well below the $45 price assumed by the central bank in October, and even further below the $60 price assumed in July, running the risk that energy investment gets cut back even further.

However, the central bank will need to see that the lower level of oil prices is leading to a decline in activity overall, according to Paul Ferley, assistant chief economist at Royal Bank of Canada.

"Consumer spending is holding up fairly well," said Ferley, as households benefit from lower oil prices.

The Bank of Canada cut its policy rate 50 basis points earlier this year as an oil price shock led to contraction in the economy in each of the first two quarters. The most recent leg lower in oil prices has revived expectations for further easing.   Continued...