UPDATE 2-Bank of Canada holds rates, worries about weak inflation

Wed Dec 4, 2013 12:02pm EST
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* Bank of Canada holds overnight rate at 1.0 percent

* Says risks of low inflation appear to have increased

* More dovish language hits C$; market pricing in small chance of cut

* BoC continues to predict soft landing in housing market

By Louise Egan and Randall Palmer

OTTAWA, Dec 4 (Reuters) - The Bank of Canada held its overnight interest rate steady on Wednesday, but sounded a touch more dovish in its outlook, saying the risks of undesirably weak inflation appeared greater than they did six weeks ago.

The change in tone knocked the Canadian dollar to its weakest level in three years. Traders slightly increased bets on the possibility of a rate cut in late 2014, though they are still pricing in less than a 25 percent chance of this happening.

The central bank stunned markets in October by abandoning 18 months of signaling that rate hikes were on the horizon. But it made clear at the time it was just as likely to raise rates as to lower them as it was caught between excessive household debt on one hand and below-target inflation on the other.

The bank's statement on Wednesday showed it was now increasingly concerned about possible disinflation after the inflation rate dropped to 0.7 percent in October. It added, however, that the balance of risks remained within the range of possible scenarios it had identified in October.   Continued...