January 18, 2017 / 3:06 PM / in 7 months

Canada central bank says interest rate cuts still on the table

Bank of Canada Governor Stephen Poloz arrives at a news conference upon the release of the Financial System Review in Ottawa, Ontario, Canada, December 15, 2016.Chris Wattie

OTTAWA (Reuters) - An interest rate cut remains on the table if the risks facing the country are realized, the Bank of Canada said on Wednesday, warning there would be "material consequences" if U.S. President-elect Donald Trump enacts protectionist policies.

Nonetheless, the central bank held rates steady, even as it nudged economic growth forecasts higher, saying the big unknown of Trump's trade policies makes it prudent to wait and see.

In its first major report since the U.S. election, the bank highlighted potential positives and negatives for the Canadian economy from changes Trump may bring, saying infrastructure spending could boost growth but tax cuts could hurt competitiveness.

Though it did not quantify the potential impact, the bank said "prospective protectionist trade measures in the United States would have material consequences for Canadian investment and exports."

Bank of Canada Governor Stephen Poloz emphasized that assessing the effects of such risks, such as Trump's promise to renegotiate the North American Free Trade Agreement, is not cut and dry, though the bank was ready to act.

"Should any of those downside risks materialize and put our inflation target at risk, then we would have the room to maneuver," Poloz told reporters.

"A rate cut remains on the table and it would remain on the table for as long as downside risks are still present."

The Canadian dollar fell to a session low against the greenback after Poloz's comments, trading at C$1.3221 or 75.64 U.S. cents. [CAD/]

The bank cut twice in 2015 amid the oil price shock. With the U.S. Federal Reserve raising rates last month, markets see a small chance Canada could hike this year. BOCWATCH

"He's trying to stamp out some of the commentary about raising rates," said Sherry Cooper, chief economist at Dominion Lending Centers.

"The only way that would happen is if the Canadian economy is much stronger than expected, which is ... probably unlikely."

The bank said key risks to the outlook included a stronger growth path in the United States triggering "animal spirits," and rising global protectionism in response to U.S. protectionism.

The loonie has strengthened with the greenback against other currencies, the bank noted, exacerbating competitiveness challenges and muting the export outlook.

The bank reiterated there is material excess capacity in the Canadian economy and "significant" labor market slack. Still, it lifted its 2017 growth forecast to 2.1 percent citing higher oil and base metals prices and a boost from government spending.

Additional reporting by Matt Scuffham, Fergal Smith and Alastair Sharp in Toronto; Editing by Meredith Mazzilli and Alan Crosby

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