The Bank of Canada, and all central banks, should be cautious about raising rates in the current economic environment, National Bank Financial warns.

“Looking at the extent of the damage left behind by Hurricane Katrina, we are now forced to admit that the spike in gasoline prices is now driven by a new supply shock (as opposed to a demand pull),” NBF said in a new research note published today.

NBF said this should bring caution from central bankers. “History has shown that central banks can exacerbate the negative impact of an energy supply shock by being overly aggressive on the interest rate front. In our opinion, the current environment warrants a prudent approach by all of the world central banks,” it said. “This also applies to the Bank of Canada.”

It noted that, using the 1973 oil shock as a guide, consumer confidence eroded quickly at the prospects of gasoline shortages and rationing. “By raising interest rates at a time when the extent of the damage to the U.S. energy complex is still unknown, the Bank would have to be assuming that the shock is short-lived, an assumption that we are not ready to make,” NBF said.

“With growing pressure on the Federal Reserve to move to the sidelines, a Bank rate hike could push the Canadian dollar to new heights — not good news for exporters,” the research note said. “In a context of low inflation (CPIX at 1.5%), would the Bank damage its credibility by postponing by another six weeks the start of its tightening campaign in order to monitor the development south of the border? We believe that the answer is No.”

Fitch Ratings said the U.S. energy industry is still in the process of assessing the damage from the hurricane. It said that while it’s still assessing damage reports from individual companies, it does not currently anticipate any widespread negative credit implications within the energy sector.

“Immediate concerns for the sector are focused on uncertainty regarding the extent of damage to, and the timing to restart, refineries located near New Orleans and the pipeline infrastructure in the Gulf,” it said.

“At the present time, the refining sector appears to have taken the hardest hit with eight refineries currently shut down and one refinery operating at a reduced rate,” Fitch reported. The outages impact 11% to 14% of current capacity.

Other sectors in the energy value chain do not appear to have sustained major damage, Fitch added. “Current reports from the drilling sector indicate that most companies have escaped the wrath of Katrina with relatively minor damage. Exploration and production companies have had an opportunity to perform aerial analyses of their facilities and most are in the process of mobilizing workers to return to offshore facilities to perform more detailed inspections. Thus far, no major damage has been reported,” it said.

“Finally, most pipelines are waiting for electricity before they can resume operations. Colonial and Plantation pipelines have resumed limited service on their pipelines as of today. No major damage has been reported to date, however this remains a vital part of the energy equation and damage to major portions of the transportation system could result in longer-term problems.”

Crude inventories are still comfortable, Fitch said. But refined product inventories were at historical lows before the storm, so the reduced refinery outputs resulting from Katrina will exacerbate inventory issues, it said. Currently, gasoline inventories stand at a record low of 18.9 days of inventory on hand using Fitch’s implied gasoline demand. This stands 10% to 15% below historical gasoline inventory levels and has been one of the key drivers to rising pump prices paid by U.S. customers.”

“In the short-term, markets should remain highly volatile, with significantly higher prices possible on news of major refinery or pipeline damage or expectations for extended shut downs,” it concluded. “Additional possibilities include localized shortages and price spikes due to distribution problems. Intermediate-term implications remain to be seen. While no significant problems are anticipated, the true extent of Katrina’s damage is still not known.”