Bank of Canada holds rates, signals no rush to follow Fed

Wed Sep 4, 2013 1:29pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada held its key interest rate steady on Wednesday but signaled it has concerns about global economic uncertainty and the health of the country's export sector, suggesting it is in no rush to follow the U.S. Federal Reserve in altering monetary policy.

In a statement accompanying its widely expected rate decision, the central bank repeated its vague tightening bias, pointing to higher rates somewhere on the horizon. But it also highlighted the slack in Canada's economy and muted inflation, and cited signs of improvement in household debt and in the housing market, all of which suggested such a move is some way off.

By contrast, forecasts are for the Fed to start scaling back its bond purchases soon as a first step towards eventual rate hikes.

The Bank of Canada was the first Group of Seven central bank to tighten policy following the global financial crisis, hiking its main interest rate three times in 2010 to the current level of 1 percent. It has since kept to the sidelines. Economists surveyed by Reuters in late August expected the bank to resume raising rates in the fourth quarter of 2014. <CA/POLL>

The bank said on Wednesday its outlook for the domestic and global economies is largely unchanged from July. Yet it noted "less momentum overall than anticipated" in the U.S. economy.

Analysts saw a slight dovish slant in the bank's wording, but doubted there would be much change in terms of a timetable for eventual rate hikes.

"On the margins, it was a bit on the dovish side, but really it's steady as she goes," said Andrew Kelvin, senior fixed income strategist at TD Securities.

The bank predicted the economy would begin to absorb excess slack in 2014, puzzling some economists who had seen that process beginning later this year, based on the bank's own growth forecasts in July.   Continued...

A pedestrian holding an umbrella walks past the Bank of Canada building during a snow fall in Ottawa January 17, 2012. REUTERS/Chris Wattie