Rising oil prices may affect timing of Bank of Canada rate cuts, economists say
Oil prices reached their highest levels in five months this week, and economists say that could make the Bank of Canada a “little concerned” as it figures out the right time to cut interest rates.
Fuelled by cuts in oil production by the Organization of Petroleum Exporting Countries (OPEC), resilience from major economies and escalating conflicts in the Middle East, West Texas Intermediate crude futures rose above US$85 on Tuesday, hitting the highest level since October.
“I think it’s something that could frustrate the Bank of Canada from cutting rates or cutting them heavily,” Douglas Porter, chief economist at the Bank of Montreal, said. “They will be a little bit concerned. There obviously are a lot of factors that drive inflation … but energy prices and headline inflation can play a pretty big role, ultimately, in terms of what the bank decides.
Several economists expect the Bank of Canada to announce its first cut in interest rates in mid-2024. But those predictions could change with oil prices following an upward trajectory in the past month and reaching their highest point in five months on Tuesday following Israel’s airstrike on an Iranian embassy in Syria.
The rise in oil prices is not extreme — there were bigger price bumps when Russia began its war against Ukraine, for instance — but the longer it remains at this point, the more problematic the situation will become for the Bank of Canada, Porter said.
“Oil prices are above where we expected them to be,” he said. “It definitely puts a question mark over the whole prospect of Bank of Canada cuts if oil prices remain under sustained pressure.”
However, the BMO economist also said it’s “fairly rare” for the bank to specifically cite oil prices as a driver of
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