July 13, 2016 / 2:12 PM / in a year

UPDATE 3-Bank of Canada stays optimistic even as it cuts growth forecast

(Adds comments from Poloz press conference, economist, detail)

By Andrea Hopkins and David Ljunggren

OTTAWA, July 13 (Reuters) - The Bank of Canada cut its growth forecast for 2016 but held rates steady on Wednesday, saying it believed exports and business investment would pick up even though it may have underestimated structural challenges facing businesses.

The central bank also toughened its warnings about possible speculation in the Toronto and Vancouver housing markets, while predicting economic growth will improve longer-term.

Galloping price appreciation in Canada’s two largest housing markets and a series of disappointments in export strength highlight the difficulty policymakers face in stimulating slow parts of the economy without unintentionally fueling near-record levels of household debt.

The bank’s steadfast optimism bucked market expectations for a more dovish message, and the suggestion that a rate cut is less likely drove the Canadian dollar to its strongest level since July 7.

“The export recovery is alive and well. We kind of have this narrative that nothing’s happened, yet what we see is seven or eight years of recovery,” Poloz told reporters.

The central bank risks “a slight dent” to its credibility in clinging to an export recovery that has yet to materialize, said Standard Chartered Bank economist Thomas Costerg.

“The problem about being too optimistic is the risk of confusing the message when the data comes in much weaker than expected time and again. Then you have to do some backpedaling,” said Costerg in New York.

As expected, the bank held its overnight rate at 0.5 percent, where it has been since last July, even as it trimmed its 2016 gross domestic product (GDP) forecast to 1.3 percent from 1.7 percent in April, saying it expected a bounceback in the third quarter and beyond.

The bank pinned softness in Canada’s non-energy export sector, which had been expected to pick up the slack from slumping commodities, on “an unexpected but temporary” slowdown in U.S. investment. But it insisted non-resource investment would dominate by year-end even with structural challenges.

The bank said the shutdown of oil sands production facilities and the evacuation of residents during the Fort McMurray wildfires in May and June cut about 1.1 percentage points from annualized GDP in the second quarter, but predicted the restoration of oil production and rebuilding efforts will boost growth by 1.3 percentage points in the third quarter.

It forecast that Britain’s vote to leave the European Union was likely to cut Canadian GDP by 0.1 percent by the end of 2018. (Editing by Jeffrey Hodgson)

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