May 9, 2016 / 9:12 PM / in 2 years

Bank of Canada to discuss wildfire impact on May 25; says too soon now

OTTAWA/TORONTO (Reuters) - It is too early to assess precisely the economic impact of the Alberta wildfire, the Bank of Canada said on Monday, adding that it will have more to say in its interest rate decision later this month.

Smoke and flames from the wildfires erupt behind a car on the highway near Fort McMurray, Alberta, Canada, May 7, 2016. REUTERS/Mark Blinch

“Bank of Canada staff are closely analyzing these still-unfolding events, and we will have more to say on 25 May, and subsequently in the July MPR (Monetary Policy Report),” said spokeswoman Rebecca Ryall. The quarterly MPR provides the central bank’s economic forecasts.

Markets have ratcheted up the odds of a Canadian interest rate cut by year-end as Alberta’s raging wildfires disrupt oil production. But economists say the temporary interruption alone is unlikely to force the central bank’s hand.

Following the wildfires and recent disappointing data, markets see a 40 percent probability of an easing by the end of 2016. At the start of May, markets were pricing in a 20 percent probability of a hike. BOCWATCH

While economists have slashed forecasts for second-quarter growth, they also said the Bank of Canada is likely to look through the weakness.

“The fires are by their nature a transitory shock, not something you can address with monetary policy,” said Andrew Kelvin, senior rates strategist at TD Securities.

Asked late last month about what it would take to consider cutting again, Governor Stephen Poloz said there would need to be a significant economic shock for policymakers to resume an easing bias.

So far, the wildfires do not appear to fit the bill. Economists expect growth lost in the second quarter will be restored in the third as rebuilding begins.

“If this wildfire proves to be a temporary setback for Canada’s energy industry, I don’t expect it to change the trajectory of monetary policy,” said Bill Adams, senior international economist for PNC Financial Services Group.

It will require second-round effects of the wildfire to trigger a rate cut, such as weaker equity prices and consumer confidence, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

The best thing the bank can do is keep an accommodative tone, which will help weaken the currency, said Frances Donald, senior economist at Manulife Asset Management.

“The fires are going to add to what I expect to be a more dovish bias heading into the May 25 meeting anyway, but it is unlikely the Bank of Canada cuts directly in response,” said Donald.

Editing by Dan Grebler

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