Bank of Canada holds rates steady as currency worries weigh

Wed Jan 20, 2016 2:29pm EST
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada decided not to cut interest rates on Wednesday but admitted it was not an easy call, as concern about a rapid decline in the currency clashed with an economic slump.

With a rate cut certain to drag the Canadian dollar lower, the central bank held rates steady, despite calls by some for action to stimulate an economy sideswiped by a prolonged drop in the price of oil and other commodities.

"It is fair to say ... that our deliberations began with a bias toward further monetary easing," Governor Stephen Poloz said in a rare glimpse into the inner workings of the central bank's Governing Council.

While some analysts called it a missed opportunity to help the economy, the rate decision helped the battered Canadian dollar CAD=D4 rebound from its lowest in nearly 13-years - at least temporarily. [CAD/]

The Bank of Canada held its main policy rate at 0.5 percent, where it has been since its last rate cut in July. But it lowered its gross domestic product (GDP) forecast for 2016 to 1.4 percent from 2.0 percent and nudged expected 2017 growth down to 2.4 percent from 2.5 percent.

The central bank acknowledged falling commodity prices represented a "setback" for the resource-rich Canadian economy and estimated that fourth-quarter growth had stalled.

The Canadian economy endured a shallow recession in the first half of 2015 and has been trying to avoid a so-called "double-dip" recession that would come with two quarters of negative growth.

Poloz said the weak currency and stronger U.S. demand will help spur an economic rebound and noted it had not incorporated in its forecasts the "positive impact" of fiscal measures promised by Prime Minister Justin Trudeau, who took office in November.   Continued...

Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada October 21, 2015. REUTERS/Chris Wattie