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Bank of Canada: low Canadian dollar plays big role in adjusting to oil shock

January 9, 20198:25 AM Reuters0 Comments

The lower Canadian dollar is playing “an important role” in helping the economy adjust to the shock of lower crude prices, the Bank of Canada said on Wednesday.

The central bank it expected weak crude prices since the middle of last year to cut gross domestic product by about 0.5 percent by the end of 2020.

Canada is a major oil exporter and in recent weeks the crude slump has helped pull the domestic currency down to an 18-month low against the U.S. dollar. This is helping mute the pain of the oil price adjustment, the Bank of Canada said.

“In particular, the lower Canadian dollar will support non-energy exports and employment and also play a buffering role for oil producers,” the bank said in its quarterly Monetary Policy Report.

The bank said the economy would suffer just a quarter of the damage it did during an oil price slump from 2014-16, in part because the energy sector is less important than it was.

The share of the Canadian oil and gas sector in total business investment has fallen to around 15 percent now from 30 percent in 2014.

At the same time, the nominal share of oil and gas output in overall GDP almost halved to 3.5 percent in 2018 from 6 percent in 2014, the bank said.

“Energy firms are better equipped to operate in a low-price environment than they were in 2014 because they have innovated and improved efficiency, including by cutting overhead costs,” it added.

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