* BOC warns of inevitable bust in commodity cycle
* BOC to unveil new commodity price index
* Provides no guidance on interest rate policy
OTTAWA, May 6 The Bank of Canada warned
investors and governments on Thursday not to bank on a
continuous rise in oil and other commodity prices, even though
they could rise to unprecedented levels.
John Murray, deputy governor of the central bank, made no
hints about the future of Canadian interest rates or monetary
policy in his speech in Edmonton, Alberta. Alberta is home to
the world's second-largest crude oil reserve.
Murray said it was tempting to see a spectacular future for
the oil industry and other commodity sectors based on rapidly
growing demand from emerging economies like China and India.
"If these two economies continue to grow at annual rates of
8 to 10 percent ... their prospective demand for commodities
could be enormous," he said in the prepared text of his speech.
"Couple this with the fact that many of the world's
resources are nonrenewable or are in limited supply, and you
have a recipe for something that's surely breathtaking."
Before the heavy losses in oil prices this week triggered
by fears over the Greek debt crisis, oil prices had been
steadily climbing since hitting a recessionary low of less than
$33 a barrel in late 2008. They had more than doubled to $80
per barrel in early May.
Murray said he could not rule out the possibility that
commodity prices would rise to unprecedented levels.
"But if history is any guide, continuous rapid upward
movement in real prices - oil or otherwise - is unlikely, as is
a large permanent increase in the real price level," he said.
Canada's economy is particularly vulnerable to these price
cycles, as natural resources account for about 10 percent of
its gross domestic product and 45 percent of exports.
The boom and bust cycles of the past have taught policy
makers not to trust in high prices, but rather to seek ways to
soften the blow when the inevitable decline comes.
Murray said those steps appear to have helped soften the
economic impact of the latest dramatic cycle -- a boom in
2006-08 followed by the biggest financial crisis since World
To help further, the Bank of Canada will release on Friday
a new commodity price index (BCPI). "This new BCPI, which
incorporates new methodology, will be more accurate,
representative and flexible," Murray said.
Murray gave no guidance on the central bank's view on
interest rates, which it has held at a record low of 0.25
percent since April 2009.
On April 20, the bank withdrew an explicit commitment to
hold rates steady until the end of June, a move that Governor
Mark Carney said constituted a tightening of monetary policy.
Most market players expect the bank to raise its benchmark
lending rate on June 1, although that view is less unanimous
than it was last week.
Yields on overnight index swaps, which trade based on
expectations for the central bank's key policy rate, suggest
there is a 58.3 percent chance of a 25 basis point hike on June
1. That is down from over 90 percent early last week, possibly
due to widespread jitters over Greek's debt crisis and the risk
of contagion. BOCWATCH
(Reporting by Louise Egan; editing by Peter Galloway)