March 9, 2016 / 3:16 PM / a year ago

Bank of Canada holds rates, says looking to federal budget

A man is reflected in a window while walking past the Bank of Canada office in Ottawa, Canada July 16, 2015.Chris Wattie

OTTAWA (Reuters) - The Bank of Canada held interest rates steady on Wednesday, citing stronger non-energy exports and an economy growing largely as expected, as it awaits this month's federal budget to gauge the impact of the Liberal government's stimulus plans.

The Canadian dollar firmed following the widely expected decision, as the central bank appeared to shrug off a recent rebound in the currency, saying that the rise in the exchange rate and oil prices are in line with what was assumed in January.

Traders had been looking to see what the bank would make of the Canadian dollar's appreciation since its last monetary policy meeting in January, with a weak currency seen essential to boosting the export sector. While the currency has firmed since hitting a 12-year low in January, it is still significantly weaker than a year ago.

"There was some fear that the bank might address some of the strength in the currency, but they ducked that pretty effectively," said David Tulk, chief Canada macro strategist at TD Securities.

As widely anticipated, the bank kept its overnight rate at 0.5 percent, where it has been since July 2015. The bank cut rates twice last year to combat the impact of cheaper oil, a major Canadian export.

Low oil prices are expected to continue to dampen growth in Canada, though the U.S. expansion remains on track and recent financial market volatility "appears to be abating," the bank said.

Despite better-than-expected domestic growth in the fourth quarter, the bank said the near-term outlook remained broadly the same as its January assessment.

The economy grew at an annualized 0.8 percent clip in the fourth quarter, topping the bank's expectations for no growth. Economists anticipate this could set the first-quarter up to exceed the bank's 1 percent forecast.

Overall, employment has held up and household spending is supporting demand, while non-energy exports are gaining momentum, particularly in currency-sensitive sectors, the bank said.

An assessment of expected government measures will be included in April's economic projections. The new Liberal government will release its first budget on March 22 and a big deficit is expected.

The bank maintained that inflation is evolving as expected, with the factors that pushed total inflation up to its 2 percent target likely to be unwound in the coming months.

It also reiterated that financial vulnerabilities continue to edge higher due to regional shifts amidst a structural adjustment in the broader economy.

Additional reporting by Matt Scuffham in Toronto, Editing by W Simon

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