March 4, 2015 / 3:23 PM / 3 years ago

UPDATE 3-Bank of Canada says January cut did its job, holds rates steady

(Adds CIBC rate forecast change, quote in paragraphs 6)

By Randall Palmer and Leah Schnurr

OTTAWA, March 4 (Reuters) - The Bank of Canada held interest rates steady on Wednesday, in line with indications it sent out over the past two weeks, signaling it was satisfied with how markets and the economy have reacted to its surprise rate cut in January.

The central bank shocked traders by easing its benchmark rate by 25 basis points in January in response to the impact of cheaper oil on Canada, a major oil producer. Oil has since stabilized, and the bank sees less risk its economic forecasts will fall short.

“The risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January,” the bank said as it announced its key rate would stay at 0.75 percent.

The current level of stimulus is “still appropriate,” it said, echoing language used last week by Governor Stephen Poloz.

Given the more optimistic tone, markets dramatically pared back bets on another cut in April to less than a 25 percent likelihood from 60 percent just before the statement. The currency also firmed.

“It suggests steady for now, maybe forever,” said Royal Bank of Canada chief economist Craig Wright. Canadian Imperial Bank of Commerce said it no longer forecasts a cut, saying “one and done” was now most likely.

Financial conditions have eased materially in response to the January rate cut and to global financial developments, the central bank said, pointing to lower rates along the yield curve and the lower Canadian dollar.

The bank said the easier conditions would mitigate the negative economic effects of cheap oil.

The negative impact of oil prices in the first half of 2015 may be more front-end loaded than projected in January, it said, while data for 2014 suggest rotation into non-energy exports and investment is well underway.

Analysts said much would depend on how the data looks early in 2015, but Bank of Montreal chief economist Doug Porter noted “it does sound like they’re pretty comfortable for now at 0.75 percent”.

Just after the Jan. 21 rate cut, the market overwhelmingly expected another one would come on Wednesday. But Deputy Governor Agathe Cote warned on Feb. 19 nothing was predetermined, and Poloz said on Feb. 24 the bank had taken out the “appropriate amount of insurance”.

By Tuesday, after release of stronger-than-expected growth figures, the market had reduced bets on a rate cut on Wednesday to about 20 percent.

Reporting by Randall Palmer; Editing by Peter Galloway

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