Brexit seen hitting Canadian growth, puts rate cuts back on table

Fri Jun 24, 2016 1:46pm EDT
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By Fergal Smith and Leah Schnurr

TORONTO/OTTAWA June 24 (Reuters) - Canada's commodity-oriented economy will suffer a blow from Britain's vote to leave the European Union, which has put the prospect of Canadian interest rate cuts back on the table.

Canada faces weakened demand from its third-largest export market and a likely delay in ratifying a long-negotiated free trade deal with the EU.

The biggest impact will be on global growth as Brexit disrupts trade and investment, weakening the price of oil and other commodities Canada exports.

That prospect drove the Canadian dollar down more than 2 percent on Friday, while Toronto's main stock index fell 1 percent and bond prices rose. Oil prices fell about 5 percent in New York.

The UK vote "injects more downside into the global growth outlook, and that's the way it will play out in Canada," said Doug Porter, chief economist at BMO Capital Markets.

Canada's economy was pushed into a mild recession in early 2015 by the collapse of oil prices, with the Bank of Canada cutting interest rates twice last year to offset the damage.

Market players this year had scaled back on bets of another cut on the back of a rebound in oil prices, stronger economic data and less dovish comments by the central bank.

That changed Friday after the British vote with overnight index swaps, which track expectations for the central bank's main policy rate, now implying a 27 percent chance of a cut this year. Swaps were priced for no change before the Brexit result.   Continued...