UPDATE 3-Bank of Canada flags risks, including C$, while holding rates

Wed Apr 13, 2016 4:56pm EDT
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(Recasts with risks to economy; adds comments from Poloz news conference, market reaction, currency analysts)

By Andrea Hopkins and Leah Schnurr

OTTAWA, April 13 (Reuters) - The Bank of Canada warned on Wednesday that the country's improving economy faced downside risks, including a stronger currency that could drag on non-commodity exports, even as it held interest rates steady and raised growth forecasts.

Citing weaker global growth, a less favorable U.S. outlook and shrinking business investment, the central bank said fiscal stimulus in the new Liberal government's first budget was one of the only positive factors driving an economy still feeling the shock of an oil price slump.

"The negative things that are still in the world and still headwinds pushing us back, my guess is that over the next two years those will continue to some degree," Bank of Canada Governor Stephen Poloz told a news conference.

As expected, the bank held its overnight rate at 0.5 percent, where it has been since last July. But it was Poloz's tightrope walk about the Canadian dollar, which briefly hit a nine-month high on Wednesday, that perked up the ears of market-watchers.

Poloz noted that the currency's sharp recovery from a 12-year low in January reflected firmer commodity prices, but said it could put at risk a much-needed recovery in non-resource exports.

Emanuella Enenajor, North America economist at Bank of America-Merrill Lynch, called the comments "jaw-boning light," referring to a central bank strategy of using commentary to try to influence a currency.

"The bank is walking a very fine line in terms of their communication. Anytime there is something positive mentioned there are a couple of headwinds that are also footnoted," she said.   Continued...