Another day, another central bank ‘shocks’ currency markets. Today it was the BOC’s turn, as Mr Poloz admitted Canada’s economy is tanking with the price of oil. Cutting the overnight rate by a token .25% to .75, the Canadian dollar index (FXC) is down just over 1.6% to a low last seen in the March 2009 depths of the great recession. The BOC did not mince words: while lower energy costs are good for some consumers, they are unequivocally bad for Canada. See: Bank of Canada ‘shocks’ market with rate cut.
“The bank warned that lower oil prices would take a sizeable bite out of economic growth in 2015, delay a return to full capacity and hurt business investment – a trend that has already triggered mass layoffs and production cuts in Alberta’s oil patch.
But the effects could spread further, threatening financial stability as a result of possible losses to jobs and incomes, according to the central bank.
“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the bank acknowledged. “The Bank’s policy action is intended to provide insurance against these risks.”
And all of this financial doom is predicated on the BOC’s still optimistic assumption of WTIC at $60 a barrel…a full 20% higher than the current level around $48, and 50% higher than WTIC’s potential $30 secular support range.
Although the mean reversion in oil prices was entirely probable, Canadian households and companies who have taken on record debt the past 5 foolish years, will take all of these adjustments very hard.