By Fergal Smith and Andrea Hopkins
TORONTO/OTTAWA, July 12 (Reuters) - Having cut interest rates in 2015 to counter the oil slump, the Bank of Canada is now looking for a handoff from housing to energy as a source of growth, hoping higher prices can cushion the impact global trade tension has on exports and investment.
The central bank raised rates on Wednesday for the fourth time since July 2017, bring borrowing costs to 1.50 percent -about halfway back from ultra-low levels of 2015 to a neutral rate that neither boosts nor hinders growth.
The Bank of Canada estimates the neutral rate as between 2.50 and 3.50 percent.
With business investment and consumer confidence both under threat from a tit-for-tat tariff fight between Canada and the United States, Bank of Canada Governor Stephen Poloz has been pleasantly surprised at a faster-than-expected rebound in oil exports in the first half of 2018, alongside higher prices.
More investment in Canada's energy sector should come hand-in-hand with planned pipeline expansion, including TransCanada Corp 's TRP.TO Keystone XL, Kinder Morgan (NYSE:KMI) Canada's KML.TO Trans Mountain and Enbridge Inc's ENB.TO Line 3, just in time to fuel broader economic growth as the country's long consumer and housing boom feels the pinch of rising rates.
"We are selling our exports at a more rapidly rising price than we are paying for imports, so this time we're importing an income lift," said Derek Holt, vice President of capital markets economics at Scotiabank. "That should carry some trickle-down benefits to consumption and investments."
With U.S. steel and aluminum tariffs expected to cut Canadian exports in the coming quarters, the robust U.S. economy and its appetite for Canadian resources are just what Poloz needs to justify further rate hikes - though relying on the boom-and-bust oil sector can be a roller-coaster.
Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets, said higher oil prices will help - but that stronger U.S. growth is the crucial factor. Even if Canada is getting a smaller slice through exports, America's pie is getting bigger.
Stronger investment and exports have already started to reduce Canada's reliance on household spending to fuel growth, while money markets see a roughly 60 percent chance of another rate hike by December. BOCWATCH
"We are really not in the camp where there is a natural pause at halftime where they go and get their orange slices and relax," Chandler said of the bank's path to further hikes.