The Oil Rally and the Economy: How will the Bank of Canada React?

Garo Mavyan | Retail FX & Precious Metals Trader

Much to the dismay of motorists around the world, oil prices have seen a seemingly unstoppable upward spike since the beginning of the year. The reasons are various: in the United States, several critical refineries have been closed either for repair or maintenance. Growing instability in key oil exporting countries such as Iran, Libya and Venezuela have limited the market's supply. OPEC, which controls nearly half of the world's oil production, has announced its members intend to cut quotas. Due to these developments, oil prices have climbed nearly 40% so far this year. Gas prices across Canada have risen accordingly, and British Columbians are paying some of the highest record-breaking prices in Metro Vancouver. Though some Canadian provinces have already introduced it, the recent implementation of a federal carbon tax in more provinces is cranking up the pressure. Still, the current sting that Canadians are feeling in their wallets is an important reminder of the need to balance supply and demand.

The prices that consumers are paying at the pumps is significant on a micro level, although the oil rally has more consequential implications for Canada on a macro level. Like the Russian ruble or Norwegian krone, the Canadian dollar is known as a 'petrocurrency' due to Canada's position as an oil exporter. Therefore, when oil prices rise, so generally does the value of the dollar. Continued strength in this sector could thus contribute to a stronger Canadian economy. This would be welcomed news for Bank of Canada Governor Stephen Poloz, who in the beginning of April reaffirmed his view that the recent economic slowdown was only temporary. He mentioned too that stimulative interest rates would be required to mitigate the stresses that low oil prices would bring. However, as higher oil prices lead to higher inflation, the recent oil rally, if sustained, could see the central bank readjusting its strategy on interest rates moving forward. The market will therefore be eagerly anticipating Poloz's tone and comments during the next interest rate decision on April 24^th. Most likely, the bank will stress the need to bring the economy into balance while cautiously monitoring trade uncertainty and the ongoing challenges of a decelerating global economy.

While Poloz and other policy makers seek to find the most appropriate course for Canadian monetary policy, it seems that, for the time being, ordinary Canadians will be stuck paying an arm and a leg to fill their tanks.