Bank of Canada holds rates, sees risks to growth

Wed Sep 3, 2008 11:04am EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada held its key interest rate steady on Wednesday and signaled it was in no hurry to cut rates any time soon, even as it warned that the U.S. economic outlook could worsen.

"The bank judges that the current level of the target for the overnight rate remains appropriately accommodative," it said in a statement outlining its decision to keep the overnight rate at 3 percent.

The move was widely expected by primary securities dealers and leaves the rate one percentage point higher than the U.S. equivalent.

But the market, spooked by data showing the economy stagnating in the first half of the year, had priced in an almost 40 percent chance of a rate cut and the Canadian dollar edged higher.

Adopting a slightly more dovish tone than it has in the past, the central bank highlighted concern that the U.S. economy not meet the 1.5 percent growth it has forecast for next year.

"There is an increased risk of a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009," it said.

It also noted Canadian growth was slightly below expectations in July and that inflationary pressures should dissipate in coming quarters, all factors weighing in favor of loosening monetary policy.

But it said domestic demand remains strong and a weaker Canadian dollar would make exports more competitive, offsetting the decline in global demand.   Continued...