Bank of Canada holds rates steady to close the year, although the Bank stated that the policy rate may still need to rise to a neutral range. Kim Parlee talks with James Marple, Senior Economist, TD Bank Group.
Well, we've seen things change really quickly in six weeks. Obviously, the oil environment is very different than it was the last time we heard from the Bank of Canada. They really reflected the downside risk to the Canadian economy from the change in energy prices saying that the energy market is expected to be materially weaker. I think notably they talked about inflation and room for the Canadian economy to grow in a non-inflationary way.
That reflects some of the momentum in GDP, but also where they see some of these downside risks to the Canadian economy. So markets have been anticipating a January hike. That's really come off the boil, really, in the last few days. And we think that's the right call. I mean, no need-- no urgency to go in January given that we've really seen some considerable changes to the Canadian economic environment.
You talked about-- I think it was one of your previous reports about almost seeing a temporary shock to the Canadian economy. And again, you talk about oil prices-- that's massive. We also have that the drop in business investment, the Q3 GDP numbers that were weaker. It's nice to hear the Bank of Canada is slowing down. I think some people were relieved, but is there a larger problem we should be focused on?
Well, that is the question-- how temporary this is. And I think, obviously, our expectation is that we will see oil prices move up. We've had the production cuts in Alberta which have helped the spread of WCS and ultimately make for a little bit better profitable environment. But we don't know. I mean, I think neither does the Bank of Canada, and these things can turn on a dime.
As I said, six weeks ago, we were in a very different oil price environment. Maybe that turns around in six weeks and where we're sort of back to where we were. But I think an absence of that and given that uncertainty, the bank will be cautious. It's always mentioned its data dependency, its risk management framework. As long as we're not certain how temporary it is, I think we'll have a slower pace of hikes.
Let me ask you-- you also say in your report this morning, which is quite good, I might add. It says when events change, I change my mind. It brings the thought that the Keynes quote. What events should we be watching moving forward or what data should we be watching?
Well, obviously, the oil markets are important. That's where things have really changed. I think, the global trade environment was something else they mentioned, that we're starting to see signs that that's weighing on economic activity. That will have some impact on Canada. Some of the other things they mentioned is the housing market and the response of Canadian households to higher interest rates.
We've had some signs of a stabilization there, but, obviously, elevated household debt levels. One of the things in the GDP report that did come out was a pretty decent slowdown in consumer spending. So they're watching that. They're watching credit growth, which has also decelerated, showing that the interest rate hikes to date have had an impact and also started drawing into question how much more they need to tighten to continue to keep the Canadian economy on an even keel basis.
I've only got about 10 seconds. So what does this all mean for the loonie?
Well, I think for the loonie there's very limited upside, unless we were to see a major rebound in oil prices.
James, thank you.