Bank of Canada Concerned by Low Oil Prices

By Andrew Rickard | January 15 2015 11:25AM

In a speech to the Madison International Trade Association in Wisconsin on Jan. 13, Bank of Canada deputy governor Timothy Lane noted that, like other countries, Canada has yet to regain its economic footing after the global economic crisis of 2007-2008. In order for the Canadian economy to reach a point where growth is self-sustaining, he suggests there will have to be a shift away from consumption and toward increased exports.

Lane says that the recent decline in the price of oil and other commodities poses "important risks" to the country's economic outlook and recovery. Initially, he suggests that the drop in oil prices could be positive as consumers gain disposable income and spend more, and as costs for manufacturers decrease."However, these gains will be more than reversed over time as lower incomes in the oil patch and along the supply chain spill over to the rest of the economy. The decline in Canada’s terms of trade will also reduce the country’s wealth," he warns.

On the whole, the Bank of Canada believes that lower oil prices will be bad for the country's economy, although some of the impact may be softened by a weakening Canadian dollar, which will help exporters.

“For the Bank of Canada, there are two main takeaways from the drop in oil prices. First, we will look through its immediate and temporary negative effect on total consumer price inflation. Second, we will closely monitor its broader impacts on growth and the delay it may cause to the economy’s return to its production potential,” concludes Lane. “We will also watch for any impacts on the rotation of demand that we have begun to witness.”