TORONTO—Low oil prices in western Canada are the most important new shock facing the Canadian economy and will be the subject of targeted conversations with the energy industry ahead of the Bank of Canada’s January interest-rate decision, Governor Stephen Poloz said Thursday.
Mr. Poloz said the central bank had expected to see some improvement in prices for heavy Canadian oil as U.S. refineries came back online, and the discount on Western Canadian Select has narrowed in line with those expectations. However, he said a backlog of stored inventory means that low prices have now spread to western Canadian light crude, called Edmonton Par, widening the impact on the Canadian economy.
“It’s the effect on light [oil] which is the newsworthy item,” Mr. Poloz said in a news conference in Toronto. He said the central bank plans to hold special, targeted meetings with members of Canada’s energy industry to discuss how the situation will affect their plans for investment and determine whether layoffs are a possibility.
“We will have a lot more information by the time we get to January to understand [the decline in oil prices], which is the most important new shock that we’re dealing with,” Mr. Poloz said.
CIBC World Markets economist Royce Mendes said the governor’s remarks provided another indication that the central bank is in a far more data-dependent state than it was during its last rate decision in October. He said the governor sounded less certain about where the neutral interest rate stands compared with past commentary and noted that Mr. Poloz didn’t rule out the possibility that strife in Canada’s oil patch could push the bank off its path toward higher interest rates.
Mr. Poloz said in a speech delivered earlier Thursday that the benchmark interest rate will need to move upward, but the pace of future increases “will remain decidedly data dependent” given global risks and lower energy prices. His comments came one day after the Bank of Canada said it would keep its policy rate steady at 1.75%.
The discount fetched by Western Canadian Select compared with U.S. crude widened to a record before narrowing more recently. Depressed prices for Canadian crude—due in part to a lack of pipeline capacity—prompted the province of Alberta to unveil production cuts for 2019, of 325,000 barrels a day or nearly 9% of output.
Mr. Poloz said a number of important economic developments emerged after the central bank struck what was a more upbeat tone at its last rate decision in October. Trade tensions between the U.S. and China intensified, and domestic economic indicators in recent weeks “have been on the disappointing side,” he said.
In addition, data revisions released by Statistics Canada indicate the level of the country’s gross domestic product is 1% lower than the central bank previously believed. Mr. Poloz said officials are analyzing the impact and that will be incorporated in a fresh economic forecast for release Jan. 9, or at the next Bank of Canada rate decision.