March 6, 2013 / 3:03 PM / in 4 years

Bank of Canada softens stance, signals rate hikes on horizon

OTTAWA (Reuters) - The Bank of Canada softened its stance on the need for interest rate hikes on Wednesday, saying it will likely hold its benchmark rate steady for "a period of time" but that its next move would still probably be a hike rather than a cut.

The central bank held its overnight lending target unchanged at 1.0 percent, where it has been since September 2010. It had been signaling for several months that it intends to raise the rate, but in January said such a move was "less imminent" and on Wednesday took another step back.

"With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 percent inflation target," the bank stated.

Inflation has been weaker than the bank anticipated but it still sees both core and total inflation returning to its 2 percent target by the end of 2014. Low core inflation was "consistent with material excess capacity."

The bank played down the economy's humdrum growth in the fourth quarter of 0.6 percent, annualized, noting "solid growth across most domestic components of gross domestic product," which was offset by a sharp drawdown in inventories.

Its broad outlook for the Canadian economy was unchanged from January. It believes growth will gain momentum through 2013 with the help of modest household spending and a recovery of business investment and exports.

Its language on the housing market and household debt were also similar, with a projection that residential investment will decline further from historical highs and the household debt-to-income ratio will stabilize near current levels.

Reporting by Louise Egan; Editing by Randall Palmer

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