UPDATE 2-Bank of Canada warns of risks to growth, holds rates steady

Wed Sep 7, 2016 12:08pm EDT
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(Recasts, adds from bank statement, economist comment)

By Andrea Hopkins and Leah Schnurr

OTTAWA, Sept 7 (Reuters) - The Bank of Canada warned on Wednesday that the economy could be weaker than it anticipated just two months ago as exports disappointed, but the central bank held rates steady as it stuck to a forecast that growth will bounce back in the second half.

In a statement that was bleaker than the market had expected, the bank also said the U.S. outlook for business investment has become less certain, despite a healthy labor market and solid consumption.

"Exports disappointed even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production," the bank said in the statement.

Canada is counting on U.S. demand to boost exports and lift Canada's economy out of the malaise as slumping commodity prices hurt the key resource sector. The Canadian economy shrank at an annual rate of 1.6 percent in the second quarter.

"The overall interpretation is maybe a little bit more dovish than what we had thought going in," said David Tulk, chief Canada macro strategist at TD Securities, adding the bank's next move might be a rate cut, rather than the rate hike many have forecast.

As expected, the bank held its overnight rate at 0.5 percent, where it has been since July 2015.

The Canadian dollar weakened against the greenback after the statement.   Continued...