November 30, 2016 / 1:47 PM / 8 months ago

Strong economic rebound gives Bank of Canada room to keep rates steady

3 Min Read

A container ship port is partially enveloped in morning fog in Burrard Inlet of Vancouver May 4, 2008.Andy Clark

OTTAWA (Reuters) - Canada's economy accelerated in the third quarter at its fastest pace in more than two years as it benefited from a rebound in oil exports, cementing expectations that the central bank will keep interest rates steady next week.

Gross domestic product grew at an annualized 3.5 percent, Statistics Canada said on Wednesday, topping economists' expectations of 3.4 percent and picking up from a contraction in the second quarter.

Last quarter brought the strongest pace of expansion since the second quarter of 2014 and exceeded the Bank of Canada's forecast for 3.2 percent growth. The economy has struggled to regain sustained momentum since it fell into a brief recession last year due as oil prices dropped.

Economists were encouraged by September's stronger-than-expected 0.3 percent growth, which suggested the fourth quarter could slow less than anticipated and potentially give the bank room to hold steady.

"It certainly reduces the probability for them to have to introduce a further ease," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "There appears to be sufficient momentum in the economy."

The Canadian dollar was boosted by the data and a jump in oil prices. [CAD/]

Policymakers meet next week. The bank cut rates twice in 2015 to combat the oil shock and acknowledged in October it had considered cutting again.

Third-quarter growth in exports bolstered the economy as energy products recovered from second-quarter weakness that resulted from wildfires in northern Alberta.

Exports of services and consumer goods gained, while increases in household consumption and inventories boosted broader growth.

The long support that housing has provided faltered as business investment in residential structures contracted. A decline in ownership transfer costs weighed after a Vancouver tax on home purchases by overseas buyers took effect in August.

The central bank has looked for a rotation away from housing and toward exports. While the data was encouraging, much depends on a stronger U.S. economy, said Sherry Cooper, chief economist at Dominion Lending Centers.

The household savings rate jumped along with disposable income. With wages growing at the same pace as in the second quarter, it suggested families were holding on to at least some of the new child-benefit checks the government began mailing out in July.

The rise in income points to room for more spending ahead, said Nick Exarhos, economist at CIBC.

Separate data showed producer prices rose in October on higher costs for energy and petroleum products.

Additional reporting by Allison Martel and Fergal Smith in Toronto; Editing by Jeffrey Benkoe and Will Dunham

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