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By Leah Schnurr and David Ljunggren
OTTAWA, May 25 (Reuters) - The Bank of Canada kept interest rates on hold on Wednesday, saying the economy would shrink in the second quarter as a result of damage from recent wildfires in Alberta before rebounding later in the year.
The central bank's preliminary assessment is that the fires and related suspension of oil production will trim about 1.25 percentage points off real gross domestic product growth in the current quarter. In its last forecast in April, the bank had projected 1.0 percent growth for the quarter.
"The second quarter will be much weaker than predicted because of the devastating Alberta wildfires," the bank said in a statement.
The fires have cut daily oil production by more than 1 million barrels, according to officials. About half of the nation's oil sands capacity remains shut, according to Reuters' calculations.
The bank kept interest rates at 0.50 percent, as widely expected, saying it expected to see a rebound in the third quarter as oil production restarted and reconstruction began.
Overall, the Canadian economy's adjustment to the lower price of oil is uneven, the central bank said. Although business investment and intentions remain disappointing, first-quarter growth appears to be in line with the bank's 2.8 percent forecast from April.
Recent economic indicators suggest the United States, Canada's main trading partner, will see solid growth this year despite weakness at the start of 2016, the bank said. Improved growth south of the border is key to the bank's outlook as it hopes to see stronger demand for Canadian exports.
The bank noted that oil prices had rebounded somewhat, partly due to short-term supply disruptions. The shock from the drop in oil prices had prompted the bank to cut rates twice last year as the economy slipped into a mild recession.
Even so, oil prices remain well off their 2014 peak. As the economy adjusts to lower prices, the housing market is continuing to show strong regional divergences and household vulnerabilities have moved higher, the bank said.
Canada's housing market has been robust in the years since the financial crisis, partly boosted by low interest rates. But the market is becoming more fractured, with activity slowing in oil-sensitive regions and accelerating in the major cities of Toronto and Vancouver. (Editing by Bernadette Baum)