UPDATE 2-Bank of Canada holds rates steady, but flags household debt risk

Wed Dec 2, 2015 12:30pm EST
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* Overnight rate remains at 0.5 pct

* Canadian dollar firms

* Analysts do not expect rate hike until Q1 2017 (Updates throughout with analyst quotes, market reaction, growth outlook, bylines)

By Randall Palmer and Leah Schnurr

OTTAWA, Dec 2 (Reuters) - The Bank of Canada held interest rates steady as expected on Wednesday, but warned of rising vulnerabilities in the household sector, where debt levels have climbed as consumers take advantage of low borrowing costs.

The Canadian dollar firmed following the central bank's policy statement, which was seen by some market players as less dovish than expected given news this week that the economy shrank in September.

"There were some who thought the bank would sound a bit more downbeat on the outlook," said Doug Porter, chief economist at BMO Capital Markets.

The bank kept its overnight interest rate at 0.5 percent, noting that Canadian and global growth is evolving broadly in line with its October outlook.

While warning that vulnerabilities in the household sector continue to edge higher, it said overall risks to financial stability are evolving as expected.   Continued...