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An oil pumping unit is silhouetted by the setting sun in this file photo. (CHARLIE RIEDEL/AP)
An oil pumping unit is silhouetted by the setting sun in this file photo. (CHARLIE RIEDEL/AP)

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Why the Bank of Canada is so worried by high oil prices Add to ...

These are stories Report on Business is following Tuesday, April 17, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Bank of Canada cites oil price It's just one line in today's Bank of Canada statement but it's worth some attention:

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"Improved global economic prospects, supply disruptions and geopolitical risks have kept commodity prices elevated. In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum."

The central bank was referring to the spread between the world price of crude and the cost for Canadian producers. Traditionally, high gasoline prices don't have the same overall economic impact in Canada because of the boon to the oil patch. Put another way, consumers pay more for gasoline, but oil companies earn more.

But there has been a spread of late between the U.S. benchmark price, the light sweet West Texas Intermediate , and the discounted price Canadian producers get for heavy oil amid a buildup of crude at the Cushing hub.

Economist Charles St-Arnaud of Nomura in New York believes the impact should be temporary, though it's clearly on the central bank's mind as it looks ahead to a stronger recovery.

Governor Mark Carney and his colleagues held their benchmark lending rate at 1 per cent today, but set the stage for a move higher, possibly later this year or early next year.

"The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business and household confidence are improving faster than forecast in January ... The degree of economic slack has been somewhat smaller than the bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013."

"The bank seems to be thinking about a small string of rate hikes at some point late this year, saying that some 'modest' reduction in stimulus 'may' become appropriate, but there’s enough doubt in that forecast that it also says that the timing and magnitude of tightening will be 'weighed carefully,'" said chief economist Avery Shenfeld of CIBC World Markets.

Carney sets the stage It's clearly time to start listening to Mark Carney when he talks about getting consumer debt under control.

The Bank of Canada governor and his colleagues today laid the groundwork for that inevitable hike in interest rates, holding steady on their benchmark rate but signalling it's going to change, The Globe and Mail's Jeremy Torobin reports.

"In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2-per-cent inflation target over the medium term," the central bank said as it held its overnight rate at 1 per cent.

"The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments."

That's the key, of course. The Canadian economy is looking up - indeed, the Bank of Canada forecast growth of 2.4 per cent both this year and next - but the euro crisis still haunts markets and the U.S. economy remains on uncertain footing.

"Overall, economic momentum in Canada is slightly firmer than the bank had expected in January," it said, its statement sparking a surge in the Canadian dollar .

Yet again, though, as he has for months now, Mr. Carney warned on consumer debt. That debt burden has been at record levels, and economists expect it to rise even more.

Toronto-Dominion Bank economist Craig Alexander, for example, said in a recent forecast that he believes the debt-to-income ratio among Canadians could climb to about 160 per cent, the level that caused such trouble for the U.S. and Britain.

"Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk," the central bank said.

Mr. Carney is "clearly uncomfortable" with rates below inflation as consumer debt pushes ever higher and the economy heads toward capacity, said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

The timing of rate hikes is left an open question, but some are betting we'll see them this year. Contrast that to the Federal Reserve's expectation to hold steady until late 2014.

"The bank seems to be thinking about a small string of rate hikes at some point late this year, saying that some 'modest' reduction in stimulus 'may' become appropriate, but there’s enough doubt in that forecast that it also says that the timing and magnitude of tightening will be 'weighed carefully,'" said chief economist Avery Shenfeld of CIBC World Markets.

Bank of England eyes Carney The Bank of England apparently has its eye on Mr. Carney.

The Financial Times reports today that a member of the Bank of England's court, the group that oversees the central bank but does not set policy, recently approached Mr. Carney about the idea of replacing Mervyn King in June, 2013.

Mr. Carney, who is respected around the world, and most recently was also tapped to head the global Financial Stability Board, would not comment to the newspaper. He is also known for deftly steering Canada out of the recession.

There is an internal candidate, and the favourite, according to the Financial Times. He's Paul Tucker, now the deputy governor. But some in Britain's Finance Minister believe the central bank needs an overhaul, given what the newspaper said was a "ponderous response" to the crisis.

Not to suggest that Mr. Carney is going to jump, but he would be the first outsider at the Bank of England in about three decades if he were to do so.

(All I can say is, the Bank of England may be a lot older and more storied than the Bank of Canada, but keep your hands off.)

RBI cuts rates India's central bank surprised markets today by cutting its key rate by half a percentage point, more than expected and a sign of concern over slowing economic growth.

Observers had expected the Reserve Bank of India would trim its repo rate by just a quarter of a point. Instead, in the first decrease in three years, the central bank took it to 8 per cent from 8.5 per cent.

The central bank cited two "broad" reasons.

"First, growth decelerated significantly to 6.1 per cent in the third quarter of last year, although it is expected to have recovered moderately in the fourth quarter," the central bank chief said.

"Based on current assessment, the economy is clearly operating below its post-crisis trend. The second consideration that shaped the policy decision is the decline in inflation"

Oracle eyed RIM One wonders what Larry Ellison thinks today about the price of Research In Motion Ltd.

Testifying in a court fight with Google Inc. today, the chief executive officer of Oracle Corp. said his company probed the idea of buying RIM and Palm Inc. in 2009 when it was considering the smartphone market, according to reports.

Mr. Ellison told the court in San Francisco that his company eventually abandoned the idea of taking out the BlackBerry maker because it was too expensive.

Oracle was, at the time, looking to crack the smartphone market in competition with the iPhone from

Oracle has a $1-billion (U.S.) suit going against Google, alleging copyright infringement related to Java and Google's wildly successful Android system. Oracle acquired Java owner Sun Microsystems two years ago.

At the time it pondered RIM, Oracle had already looked at making its own device, and had rejected the idea. Among other things, it lacked the expertise.

Those were, of course, more heady days for RIM. While the exact date isn't known, RIM shares were trading at about $90 at one point, compared to just over $13 today.

Palm was acquired by Hewlett-Packard Co.

Factory shipments slip A drop in autos and auto parts - the first since last summer - pushed down overall sales among Canadian manufacturers by 0.3 per cent in February. Today's reading from Statistics Canada marked the third decline in eight months.

While autos took the brunt of the decrease, along with food shipments, 11 of 21 industries measures suffered a hit. Those accounted for almost 65 per cent of overall manufacturing.

Auto sales fell by 8.7 per cent, the first decrease since June 2011, the federal agency said, while parts slipped 7.2 per cent for the first decline since August.

Given the sector, most of the decline came in Ontario.

Inventories increased 0.3 per cent - it's the 16th rise in 17 months - while the inventory-to-sales raio inched up to 1.34 from 1.33. Unfilled orders climbed 1.9 per cent. That's the first spike since last November.

"The second consecutive drop in factory volumes will weigh on February’s Canadian GDP," said senior economist Krishen Rangasamy of National Bank.

"That said, a rebound can be expected in subsequent months given the uptick in U.S. demand. For instance, auto assemblies south of the border are quite active to say the least and with U.S. inventories to sales relatively low, we expect demand for Canadian autos and parts to pick up."

Goldman hikes dividend Goldman Sachs Group Inc. delivered shareholders some good news today, beating expectations for its first-quarter results and boosting its dividend by 31 per cent.

The Wall Street giant earned $2.11-billion (U.S.), or $3.92 a share, diluted, compared to $2.74-billion or $1.56 a year earlier, which was impacted by a hefty preferred dividend.

Revenue slipped to just shy of $10-billion, but above what analysts were expecting.

The quarterly dividend rose to 46 cents.

Chief executive officer Lloyd Blankfein cited the softness in investment banking.

"Because client activity remains relatively low in certain areas, especially in parts of investment banking, we believe that our mix of businesses gives the firm significant room for revenue growth as economic and market conditions continue to improve," he said in a statement.

Canada to cut back oversight Resource industry's are applauding the Canadian government's plan to cut federal oversight of proposed natural resource developments and hand over much of the responsibility to the provinces, The Globe and Mail's Shawn McCarthy, John Ibbitson and Nathan VanderKlippe report.

But environmental groups worry the government is preparing to abdicate its responsibility for environmental protection.

Natural Resources Minister Joe Oliver plans to focus Ottawa’s role in environmental assessments to projects it deems to be of national significance.

Under the proposed legislation, Ottawa would concentrate its effort on environmental assessments of “major economic projects,” according to background information obtained by The Globe and Mail. Provinces will set their own level of oversight for smaller projects.

Military spending flat Debt troubles in Europe and the United States are holding down military spending after 13 years of rising costs.

It's not just the austerity measures among the debt-burdened nations of the euro zone, of course. U.S. spending has also decreased for the first time since 1998 as operations in Iraq and Afghanistan decline, according to a new report released today.

The report from the Stockholm International Peace Research Institute estimates military spending last year at $1.74-trillion (U.S.). That's up from 2010, but adjusted for price changes and a weaker U.S. dollar, it's just 0.3 per cent higher, the group said.

"It is too early to say whether the flattening of military spending represents a long-term change of trend," said the report.

"On the one hand, U.S. spending is likely to fall due to the withdrawal of U.S. forces from Iraq and the draw-down in Afghanistan, while austerity measures in Europe are likely to mean continuing falls there in the next two to three years. On the other hand, spending in Asia, Africa and the Middle East continues to increase."

The group expects spending in the United States to continue to fall over the next few years because of both a declining war budget related to Iraq and Afghanistan, and budget measures to cut hundreds of billions from the Department of Defense.

"Austerity measures have been sweeping across Europe since 2010, as countries have prioritized deficit reduction above other economic goals, and military expenditure cuts have usually been part of such measures," it added.

Russia and China, however, have boosted their spending.

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