December 18, 2015 / 7:04 PM / 3 years ago

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

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.

The economy pulled out of recession in the third quarter, but momentum softened heading into the final quarter of the year and data for October, including a 1.8 percent drop in exports, has mostly disappointed.

“We can’t rule out the risk of another dip in GDP (gross domestic product),” said Derek Holt, vice president of economics at Scotiabank.

The central bank is due to make its next interest rate announcement and update its economic projections on Jan. 20.

“I see much less evidence of the rebound in key sectors than the Bank (of Canada) does,” said David Watt, chief economist at HSBC Bank Canada.

A rate cut in January would be “prudent,” he added. (Reporting by Fergal Smith; Editing by Dan Grebler)

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