Canada Disappoints, Keeps Rates Unchanged As Oil Patch Burns

On Tuesday in “Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens,” we outlined the dilemma facing Stephen Poloz and the BOC.

If the central bank cuts rates and drives the loonie lower, Poloz may be able to keep the CAD price of WCS above the marginal cost of production and thus avoid shut-ins that would cost the Canadian economy still more oil patch jobs.

However, further loonie weakness risks triggering a backlash from Canada’s beleaguered consumers who may scale back spending if their purchasing power is further eroded (i.e. if cucumbers continue their relentless push towards $10).

In short, the BOC is damned if they do and damned if they don’t, and going into Wednesday, the rate decision was a coin toss.

Well, Poloz has spoken and the Bank of Canada has decided to save its dry poweder for another day. The benchmark rate remains on hold at 0.50% even as the central bank cuts its GDP forecast.

BANK OF CANADA MAINTAINS BENCHMARK INTEREST RATE AT 0.5%

BANK OF CANADA CUTS 2016 GDP FORECAST TO 1.4% FROM 2%

ECONOMY TO RETURN TO POTENTIAL BY ABOUT END OF 2017: BOC

BOC: `CURRENT STANCE OF MONETARY POLICY IS APPROPRIATE’

And there goes whatever was left of the oil patch, up in a 150 pip plume of smoke…

To be sure, this is just delaying the inevitable and here’s the chart that explains why:

A rising CAD effectively drives the country’s producers out of business. The longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.