December 3, 2014 / 3:33 PM / in 3 years

Bank of Canada sees broadening recovery, oil price risk

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie

OTTAWA (Reuters) - The Bank of Canada held its policy rate at 1 percent on Wednesday, declaring that while Canada’s economic recovery is broadening to include exports and business investment, lower oil prices could cut inflation more than expected.

The bank’s statement was seen as slightly more optimistic than recent communiques, and it helped boost the Canadian dollar. Economists were cautious, however, about how much of a bearing it would have on the timing of any policy tightening by the bank. [CAD/]

“It’s a pretty even-handed policy statement. For every good thing there’s an offsetting bad thing,” said BMO Capital Markets senior economist Sal Guatieri, who held to his forecast of a rate increase next October.

Governor Stephen Poloz has long looked for the driver of the economy to rotate from the overstretched consumer to exports and then business investment.

Noting that stronger exports were beginning to be reflected in increased business investment and employment, the statement said this suggests “the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun.”

The bank dismissed higher-than-expected inflation as largely temporary, warning weaker oil prices pose an important downside risk.

But it said this was tempered by a stronger U.S. economy, weaker Canadian dollar and recent federal fiscal measures.

“They’re walking a very fine line,” Toronto-Dominion Bank chief economist Craig Alexander said. “The bank clearly doesn’t want to indicate an increasing desire to tighten policy.”

Nonetheless, the Canadian dollar CAD=D4 strengthened. And overnight index swaps, which trade based on expectations for the main policy rate, showed traders slightly increasing their bets that there will be a rate hike in second-half 2015. BOCWATCH

Given recent encouraging developments, the bank said the output gap appeared to be smaller than projected in October, though the labor market continues to indicate significant slack.

The bank showed increased concern over high household debt and housing prices, saying household imbalances “present a significant risk to financial stability”. In October, it said risks from household imbalances were “edging higher”.

The bank has kept rates on hold since Sept. 8, 2010, one month shy of the longest stretch since 1950, which was the four years and four months from Oct. 19, 1950, to Feb. 17, 1955.

Analysts surveyed by Reuters forecast rates will stay where they are until the fourth quarter of 2015. That would be the longest stretch without a change since 1944-1950.

Editing by Peter Galloway and Jeffrey Hodgson

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