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

Wed Mar 4, 2015 2:25pm EST
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(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.   Continued...