The Bank of Canada may have painted a rosier picture for Canada's economy Wednesday, but it warned that an unlikely culprit was harming the country's growth: oil prices.
In its quarterly Monetary Policy Report, the bank called attention to what it sees as the "unfavourable" distortion that has developed between Canadian oil prices and global prices.
Despite the fact that Canada is a major oil producer, prices for Canadian crude have fallen below those in both the United States and Europe, owing mainly to the massive oil glut that has developed at U.S refineries in the Midwest, where much of Canada's crude is pumped. And while Canada gets paid less for its oil in global markets, provinces that rely on global oil imports are paying more.
"The increase in the price of our oil imports raises production costs for Canadian firms and also puts upward pressure on gasoline prices, since about half of the gasoline purchased in Canada is produced using refined petroleum priced off Brent," the bank said. Brent is one of two major global oil benchmarks, the other being Western Texas Intermediate.
Alongside concerns about oil, the Bank of Canada also warned about the risk that household debt poses to Canadians.
While the bank said it sees an eventual reversal in the growth of house-hold debt, its latest Monetary Policy Report noted that household debt-to-GDP ratios are expected to grow even higher, and gave no forecast for when Canadians might start paring down their debt.
"It's hard to predict exactly when the process will come to an end," said Bank of Canada Governor Mark Carney during a news conference on Wednesday.
Overall, however, the Bank of Canada did paint a rosier outlook for the Canadian economy in 2012. As it revealed when it kept its benchmark interest rate at one per cent on Tuesday, the Bank now sees Canada's economy growing by 2.4% this year, up from its earlier 2.2% target.
Stronger-than-expected growth in the United States and a less severe recession in Europe are forecast to prop up Canadian growth. The bank is now predicting U.S. gross domestic product will jump by 2.3% in 2012, rather than its earlier 2% target. It also sees the euro-zone economy contracting by only 0.6% this year, an improvement from its earlier forecast of a one per cent contraction.
The bank also noted that the Canadian dollar has reached a loftier level than in its January report. The dollar averaged $1.01 U.S. in March, com-pared with 98 cents U.S. in January, and the bank assumes it will remain there in the near term.
As far as inflation is concerned, the Bank of Canada sees core inflation as hovering below 2%this year, while rising to slightly above its 2% target throughout most of 2013.
The bank did acknowledge, however, that higher gas prices have led to higher-than-expected inflation in recent months, though it expects those prices to moderate.
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