Good morning. The Bank of Canada is expected to hold its benchmark lending rate today. For that matter, it’s expected to keep rates steady for the next several months. Today, we’ll look at how the federal government might soon acquire more of the spotlight.
Up first
In the news
Medication: An Indian pharmaceutical company has become the first drug maker authorized to sell a generic version of the blockbuster drug Ozempic, according to Health Canada.
Trading: Barrick Mining Corp. has chosen New York for the primary stock listing of its upcoming North American spin off, a potential upset for Canada’s capital markets.
Energy: The UAE’s exit from OPEC marks a big blow to the oil cartel’s price-setting power, Eric Reguly writes. Will Venezuela be next out the door?
Smash! Indeed.
In focus
Where the rubber meets the road
There isn’t much of a chance the Bank of Canada will do anything but hold its key lending rate steady in a couple of hours – although now that I’ve crossed the Dewey defeats Truman divide, the odds have increased.
In holding the rate steady at 2.25 per cent last month, central bank Governor Tiff Macklem said his team would “look through” the oil price shock resulting from the Iran war, so long as it didn’t drive up consumer prices.
Based on the data available, the effect of higher oil prices on other goods – following Iran’s shutdown of the Strait of Hormuz after the February U.S.-Israeli attack – appears to be contained.
Gasoline lifted headline inflation by Statistics Canada’s most recent measure. Stripping out categories that are most sensitive to geopolitical and shocks like gas and food, however, shows inflation rose at just above the bank’s target of 2 per cent.
Households, of course, aren’t able to strip out those measures. Higher fuel costs are already shaping spending plans. Travel, typically among the first sectors to feel the consequences, is already showing signs of stress before the summer vacation season kicks into gear.
How long is temporary?
The war in Iran has reached its two-month mark, and the Strait of Hormuz has been effectively shut down almost as long – removing millions of barrels from a route that carries about 20 per cent of the world’s oil supply and sending prices sharply higher.
Even with Prime Minister Mark Carney’s decision to suspend the federal fuel tax until the fall, gas prices are about 31 cents per litre higher than before the war. The estimated $5 to $10 shaved off the cost of filling up most cars will help, but may not be enough to reverse plans to avoid long-distance summer travel.
That shows how higher oil prices can create new pressures on households. About 50 per cent of Canadian vacationers, who account for 75 per cent of the country’s tourism spending, are planning to stay within their home province because of high oil prices, according to a recent Narrative Research poll. Only a quarter say they might still drive to another province.
It’s hard to see how oil and gas prices can come down meaningfully over the next couple of months. Oil futures – a proxy for what traders expect prices to be next month – can move quickly when negotiations in Iran appear close to a breakthrough. But any deal would need to be backed by evidence that its terms are being honoured, and insurers will want assurance that tankers can move safely through the region.
That is to say: A deal alone wouldn’t address the amount of oil and gas available right now, or even by the end of summer – when gas prices are typically at their highest. It could take several months for tankers to unspool through the strait.
Spreading our wings?
Nor are Canadians exactly finding a more cost-effective alternative in flying. Air Canada and WestJet have joined airlines around the world in raising ticket prices owing to the high price of jet fuel, which has increased even faster than crude.
Travel isn’t Canada’s largest sector, but it is a meaningful one, touching everything from airlines and hotels to local services. The combination of rising prices alongside softer demand is a useful case study of the dynamic Macklem is trying to keep at bay.
When economists say “temporary shock,” we don’t often stop to think about how long they mean. In Canada, the bank has said it will need more evidence that oil prices have hit a wider range of spending before it moves. Given the length of the war and most recent inflation data, we wouldn’t expect changes anytime soon.
A hold today by the Bank of Canada would underscore the limits of what interest rates can do, and shift attention to what the federal government is promising to deliver. This week alone, Ottawa has announce a new sovereign wealth fund, fresh spending on skilled trades, and a smaller deficit than it forecast in November – thanks, in a crude irony, to stronger personal and corporate tax revenue lifted by higher oil prices.
That’s a political tradeoff for the Carney government, pressing ahead with long‑term projects even as affordability pressures continue to weigh on many Canadian households.
Perhaps, if periods of volatility are truly becoming more frequent, the central bank’s rate announcements might also serve as a routine reminder to check in on the federal government, and how its plans to build Canada strong are helping the country become less exposed to external shocks in the first place.
Charted
I think we need space
Plans to expand the runway at Billy Bishop Airport on the Toronto Islands to accommodate jets could involve adding up to 900 metres of extended land into Lake Ontario, much more than proposed when the idea was last quashed a decade ago.
Quoted
Writing songs is a way to locate myself in my own private speed of time.
— Feist
Tragically Hip, Feist, Roch Voisine and Loverboy are set to be inducted into the Canadian Songwriters Hall of Fame.
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More files we’re following
Before the bell: Investors are bracing for earnings from five of the Magnificent Seven: Google parent Alphabet, Microsoft, Amazon, and Meta Platforms report today. Apple is up tomorrow.
Morning update
Global markets were mixed as attention turned to interest-rate policy decisions in Canada and the U.S. plus Big Tech earnings.
Wall Street futures were muted while TSX futures edged higher.
Overseas, the pan-European STOXX 600 was down 0.34 per cent in morning trading. Britain’s FTSE 100 slid 0.85 per cent, Germany’s DAX eased 0.15 per cent and France’s CAC 40 gave back 0.59 per cent.
In Asia, Japan’s Nikkei was closed, while Hong Kong’s Hang Seng closed 1.68 per cent higher.
The Canadian dollar traded at 73.10 U.S. cents.