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Bank of Canada said on Wednesday that it expects real gross domestic product (GDP) to grow by 1.7 percent this year, revising down its forecast by 0.4 percentage points compared to the October outlook, as the drop in global oil prices over the past two months has a material impact on the Canadian outlook.
“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income,” the bank said today, keeping the target interest rate at 1.75 percent.
Referring to the pace of interest hikes, Bank of Canada said that “The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.”
Apart from lower international oil prices, Canada’s oil industry has seen transportation constraints and rising production, which “have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices.”
“While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further,” according to Bank of Canada.
In its Monetary Policy report also published on Wednesday, the bank said that the key challenges to its economic outlook would be the developments in oil markets.
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“The outlook is subject to several sources of uncertainty, including the persistence of the oil price decline and the size of spillovers to non-oil-producing regions, the adjustment of household spending to tighter mortgage finance guidelines and higher interest rates, and global trade policy and geopolitical issues,” the bank noted.
Since the October report, the sentiment in the Canadian energy sector has deteriorated, according to the bank’s consultations with firms in the industry. Although Alberta’s oil production cut has helped narrow the price differentials of Canadian heavy oil to WTI—with the discount at its narrowest in a year this week—energy companies in Canada continue to be concerned about the outlook in the medium term, Bank of Canada said.
“For instance, the ongoing lack of export infrastructure continues to hamper the ability of many energy firms to raise funds in debt and equity markets,” the bank noted.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.