Further weakness in oil prices and a housing market crash feature among the factors that could cause the Bank of Canada to cut rates once again, say Desjardins economists.

In a new report, the cooperative financial group details five developments that could motivate a further rate cut from the Bank of Canada. The base case for both the BoC and Desjardins is that rates remain unchanged for the time being. “However, in the current context, one cannot rule out scenarios of further rate cuts,” it says.

Scenario one concerns further weakness in oil prices. “The surprise decision to cut interest rates in January was predicated on the principle of an insurance policy, to counter the negative effects of the fall in prices on the Canadian economy. A new leg down could thus prompt the BoC to take out more insurance,” it says.

In scenario two, Desjardins says that even if prices don’t fall further, it’s possible that income could suffer more than currently projected under the Bank’s forecasts. “A scenario whereby oil prices are roughly in line with the BoC’s estimate but income growth is penalized more heavily than envisioned, is not entirely implausible. Signs confirming the materialization of such risk could result in the BoC cutting rates again.”

Scenario three focuses on the Canadian housing market and Desjardins suggests that signs of a severe housing correction, and a tightening of financial conditions, “would be serious enough factors to bring the BoC to lower its policy rates again.”

Scenarios four and five focus on weakness in the domestic recovery, d an unexpected slowdown in the U.S. economy — which could prompt the Bank to cut rates further.

The report notes that there are also risks of rate hikes, however, it says that in the short term, “we judge the risk of further cuts to take more importance than the opposite scenario.”

“The current situation indicates that the BoC should keep the status quo, while monitoring closely the evolution of the risk factors aforementioned. This is our base case,” Desjardins concludes. “That said, when considering the various alternatives, in the short term, the risk of a further rate cut appears to take more importance than that of a return to 1%.”