What you will find in the Jan. 2016 BoC Monetary Policy Report

The Bank of Canada (BoC) released its quarterly Monetary Policy Report on January 20, 2016. It’s usually a gold mine of relevant information for agricultural markets, with insights not only about the key interest rates, but also the Canadian dollar (CAD) and the economic growth prospects of China and India, two of Canada’s key ag export markets.

Stable for now, but is a rate cut on the horizon?

Here’s what the BoC did:

  • Offered a subdued outlook for short-term borrowing costs
  • Left the overnight rate unchanged for now
  • Cut the key rate before the beginning of summer, thanks to continued weakness in oil and other commodity markets. The financial markets fully reflect this possibility at this time.

I’d be surprised to see short-term and long-term interest rates trend in opposite directions at this stage, but it may happen later in 2016 given that the U.S. Federal Reserve (the Fed) has implemented their first rate hike

The Fed rate hike didn’t change the BoC’s decisions about its key interest rate, which is based on its outlook for the Canadian economy. At this point, the two economies are on divergent paths.

How low will the Canadian dollar go?

The CAD may reach new lows against the USD. It could also strengthen in the second half of 2016 if we see higher commodity prices, especially for oil. That may happen, but the BoC’s outlook for oil won’t be positive. Oil inventories show a global supply still dwarfing potential demand. It’s not exactly a recipe to strengthen oil prices in the medium-term.

On the other hand, positive U.S. economic growth could ramp up Canadian exports and economic growth here. An improvement in the Canadian economy, even if it happens in the second half of 2016, could close the loonie’s gap towards US$0.70.     

Do China and India still control demand for agricultural commodities?

Lentil prices have risen recently, driven mostly by India’s production difficulties. Those difficulties won’t last forever; the long-term prospects for strong prices will come from strengthening demand as a result of rising consumer income. Similarly, prospects for the oilseed markets are directly attached to the strength of demand from China.

2016 economic growth in China will slow; India will see a more upbeat outcome. But beyond the growth in gross domestic product, I’m watching signals of economic stability suggesting growth in their consumers’ disposable income. We need strong demand for agricultural commodities at a time of expanding global supplies.

I’m speculating about this of course, but these are the things I think you’d do well to watch in the first half of 2016. Check back with us for further insights into the Canadian dollar, interest rates and world economic growth.

J.P. Gervais, Chief Agricultural Economist