Bank of Canada holds rates, sees exports lifting growth

Wed May 27, 2015 11:59am EDT
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada held its key interest rate at 0.75 percent on Wednesday, largely shrugging off a weak U.S. economy in the first quarter, and said solid U.S. growth this quarter should help Canadian exports and business investment.

The market had widely expected bank Governor Stephen Poloz to keep the benchmark rate steady, but some analysts had begun to question whether the U.S. recovery would deliver as strong a bounce-back in Canada as he expects. [CA/POLL]

The bank acknowledged that first-quarter U.S. weakness had raised questions about that economy's underlying strength but said it "expects a return to solid growth in the second quarter".

"Although a number of complex adjustments are under way, the bank's assessment of risks to the inflation profile has not materially changed," the bank said.

Bank of Montreal Chief Economist Doug Porter said the language suggested policymakers are a little less confident that underlying inflation is as low as they thought, but overall it was a "stand-pat statement."

The bank's forecast in April, which it said remained broadly in line with the current outlook, was for 1.8 percent annualized growth in the second quarter and 2.8 percent in the third.

Toronto-Dominion Bank macroeconomic strategist Mazen Issa said there was a non-trivial risk that growth would disappoint and the market may have gone too far in pricing out another easing.

"We're not saying the bank is going to cut rates, but they may be way too optimistic in the growth outlook for the second half of the year," he said.   Continued...

Bank of Canada Governor Stephen Poloz speaks during a news conference upon the release of the Monetary Policy Report in Ottawa April 15, 2015.  REUTERS/Chris Wattie