RBC Economics’ Claire Fan and Nathan Janzen argue higher Oil prices from current supply disruptions are unlikely to trigger a major Bank of Canada policy shift. Past rate cuts in 2015 reflected a structural Oil shock, unlike today’s geopolitical spike. They highlight BoC guidance to ‘look through’ short-lived supply shocks and still forecast steady policy rates through 2026.
Geopolitical oil shock unlikely to move policy
“The BoC has responded to oil price changes in the past with rate adjustments. It cut the overnight rate by 50 basis points when prices collapsed in 2015. However, the shock at the time was fundamentally different from now. The 2015 decline was driven by a surge in U.S. production capacity widely viewed as structural and permanent.”
“Current oil supply disruptions and rising oil prices, by contrast, are unlikely to be viewed as the same. There is the risk the conflict persists, and oil prices remain elevated for longer. That, however, is still unlikely to be viewed as stable or persistent enough to warrant a reversal in large-scale business investment mostly dormant in the Canadian oil sands since collapsing a decade ago.”
“Earlier this month, BoC Deputy Governor Sharon Kozicki reinforced in a speech that monetary policy response to supply shocks depend crucially on their size and duration. Short-lived supply shocks with limited economic implications typically invite a “look-through” response from the central bank.”
“If the supply shock persists long enough to warrant a policy response, the direction could also vary depending on the output-inflation trade-off. Higher energy prices mechanically raise headline inflation, but lower household purchasing power—potentially weakening demand for non-energy goods and services and widening the economy-wide output gap.”
“The recent run-up in oil prices has been sizable, but it’s too early for the BoC to respond without greater clarity on future developments. Our forecast remains for the central bank to hold interest rates steady through 2026.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/boc-rates-seen-on-hold-through-2026-rbc-202603110634
