September 14, 2016 / 1:37 PM / in a year

UPDATE 1-Bank of Canada's Wilkins sees 'smart pick-up' in U.S. growth

(Recasts with Wilkins' comments on U.S., Canadian exports, adds Brexit)

By David Milliken

LONDON, Sept 14 (Reuters) - The U.S. economy looks set to accelerate over the rest of the year, a senior Bank of Canada official said on Wednesday, a potentially encouraging sign for Canada just a week after the central bank warned of risks to domestic growth.

The downside risks to inflation that the bank flagged in its recent policy statement were due to question marks around exports, Senior Deputy Governor Carolyn Wilkins said, with weakness in the sector in the second quarter only partly explained by temporarily weaker U.S. business investment.

"Things are aligned for a smart pick-up in the U.S. for the rest of the year and then solid growth after that," Wilkins said.

Stronger U.S. growth is seen as key to reviving the export sector in Canada, whose biggest trading partner is its neighbor to the south.

If the U.S. Federal Reserve decides to raise interest rates, it will be because it sees solid strength in the U.S. economy as well, which is a good thing for Canada, Wilkins said.

The Bank of Canada warned last week that the Canadian economy could be weaker than it had anticipated just two months ago. While the bank is largely expected to hold rates where they are until 2018 after cutting twice last year, a small minority expect it will cut again.

The Bank of Canada had said that while a healthy job market and consumption in the United States should remain supportive of growth there this year, the outlook for business investment had become less certain.

Wilkins' comments followed a speech in which she said the reduced potential for global economic growth and resultant lower neutral interest rates could pose risks for financial stability.

"While we typically link financial stability risks to unsustainably high growth, slower growth and lower returns can also add to vulnerabilities in the financial system," she said.

Those risks could materialize in a number of ways, she said, including that investors could take on more risk.

Speaking before the Official Monetary and Financial Institutions Forum in London, Wilkins said it was still in the early days for judging the impact of Britain's decision to leave the European Union.

"Where it all settles out really depends on how elegant the negotiations go," she said. "It's just too early to say. We have marked down our forecasts a little bit because of it, but not a lot, because we are assuming it is going to go well." (Writing by Leah Schnurr in Toronto; Editing by Diane Craft and Jeffrey Benkoe)

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