As Oil Slumps, Bets Shift to Jan. 20 Bank of Canada Rate Cut

  • BMO and CIBC join TD in calling for 0.25% overnight rate
  • Crude at about $30 makes some oil production `uneconomic'

The Bank of Canada will cut interest rates next week to stem the widening economic damage from slumping oil prices, according to a growing number of economists and investors.

Bank of Montreal and Canadian Imperial Bank of Commerce are now calling for a quarter-point rate cut at the Jan. 20 decision to 0.25 percent, which would match the 2009 record low. Toronto-Dominion Bank was the first of Canada’s big lenders to call for a cut. Crude collapsed to below $30 a barrel this week. The current price is approaching levels where “existing production becomes uneconomic,” and increases risks that production shutdowns will exacerbate the impact, TD’s head of global macro strategy David Tulk said in a note Wednesday.

Trading in overnight index swaps show investors are putting the odds of a rate cut at about 50 percent, compared with 16 percent a month ago.

“It was more just the persistent relentless downward dive in oil and other commodity prices that was reason number one” for the forecast change, Doug Porter, chief economist at BMO Capital Markets in Toronto, said by telephone. “It’s still a close call.”

Bank of Canada Governor Stephen Poloz cut his overnight rate twice last year -- in January and July -- to guard against the damage of crude oil prices that slumped to less than $50 a barrel from more than $100.

Bank of Canada's policy interest rate and crude oil futures, since June 2013 when Governor Stephen Poloz started at the central bank.
Bank of Canada's policy interest rate and crude oil futures, since June 2013 when Governor Stephen Poloz started at the central bank.

‘Odds Tilted’

Canada’s dollar fell below 70 U.S. cents this week for the first time since 2003. Yields on 10-year government bonds touched a record low 1.192 percent.

“We see the odds having tilted in recent days, and are now ever so slightly on the side of seeing a rate cut in January, or April at the latest,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a research note Thursday. “The Bank may feel that a cut now would not be a shocking surprise to the Canadian dollar or other markets.”

With three of Canada’s five big banks changing their predictions to a cut this week, the tally in a Bloomberg economist survey now stands at 14 of 27 calling for a cut, with the remainder predicting no move.

Royal Bank of Canada chief economist Craig Wright and Derek Holt, Scotiabank’s vice-president of economics, expect Poloz will stand pat at 0.5 percent. Along with its rate decision Jan. 20, the central bank will also release its quarterly monetary policy report that will include any revisions to growth and inflation forecasts.

Complex Adjustment

Canada is set to benefit from a weak dollar that boosts non-energy exports, Poloz said this month in Ottawa. He also said the adjustment from the commodity shock is complex and will take years to play out, and predicted policy divergence will be a dominant theme, as a strengthening recovery in the U.S. prompts the Federal Reserve to rein in stimulus.

The central bank’s Business Outlook Survey, released Monday, showed damage from the slump is widening beyond the oil-patch, and executives had the lowest readings on investment, hiring and inflation since 2009 during Canada’s last recession.

That report boosts the case for a rate cut, Porter said. “With oil prices unlikely to rebound meaningfully in the near term, there’s little reason to expect improvement or even stability for at least the next couple of quarters,” he said in a research note outlining his call for a cut.

(Updates with comments from eighth paragraph.)

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