Ali Hanif December 19, 2018 No Comments

2018 will end without an increase in interest rates. The Bank of Canada (BOC) announced on Wed. Dec. 5th that its benchmark rate of 1.75% would hold steady. The enthusiasm and confidence the BOC previously expressed about the overall state of the economy was gone in its most recent announcement.

Alberta crude oil

The continuing collapse in oil prices, record high mortgage and consumer debt, and slowing economic growth were the key factors the BOC cited as dead weights to the economy. In response to the lack of rate tightening, the loonie fell to stabilize to 75 cents. The BOC is especially pessimistic of the long term prospects of Canada’s energy sector.
The news will come as a sign of relief to the real estate sector and will result in a pause in the general trajectory of higher mortgage and interest rates seen over the last few months. Mixed real estate data underpins the need for more caution from the Bank. The fall in the exchange rate will also benefit manufacturers, especially those in southern Ontario and parts of Quebec. While static rates will help Western Canadian consumers and businesses, their pain is significant and cries for assistance and greater government intervention are being made by Alberta and Saskatchewan Premiers Rachel Notley and Scott Moe. 
Canadian crude oil is being priced at rates as low as $14 a barrel – even as U.S. crude has rarely ever sells for less than $50 a barrel. With existing Canadian pipelines at full capacity and oil shipped by train overloading rail networks, there is essentially no room to maneuver for exporters who can’t get their product to market efficiently. The Federal government’s plan to expand pipeline networks to B.C.’s coast have failed due to legal challenges and resistance from apprehensive and environmentally conscious First Nations groups. Pipelines planned to the east coast (Energy East) face considerable regulatory, financial, political, and social hurdles. The failure to properly export Canadian oil has been a recurring strategic economic challenge for many decades. 
Oil’s fundamental importance to the Canadian economy was highlighted in the value of the exchange rate from 2010 to late 2014, when Canadian oil sold for $80-100 a barrel. In those years, the Canadian dollar approached or met U.S. dollar parity – fuelling a boom in cross border shopping, and strong domestic and corporate leveraging. How times have changed.

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