October 25, 2017 / 2:07 PM / in 2 months

Bank of Canada holds rates steady, pledges caution

OTTAWA (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, saying that while less stimulus will be required over time the bank will be cautious as it considers future moves given the risks and uncertainties facing the economy.

FILE PHOTO - A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

In a dovish statement that emphasized “substantial uncertainty” about the renegotiation of the North American Free Trade Agreement, the central bank said the economy is operating close to its potential but slack remains in the labor market.

The cautious tone after back-to-back rate hikes in July and September sent the Canadian dollar tumbling lower, and bets on a December rate increase slipped to less than 30 percent from 37 percent before the rate announcement. BOCWATCH

The Canadian dollar slumped more than one cent, hitting its weakest since Aug. 15 at C$1.2775, or 78.28 U.S. cents.

“We were thinking January (for the next hike), but that’s at risk now, we could push it out further into 2018,” said Sal Guatieri, senior economist at BMO Capital Markets.

The central bank noted the recent appreciation of the Canadian dollar twice in its policy statement, saying inflation will rise to 2 percent a bit later in 2018 than previously expected and export growth will be slightly slower because of the stronger currency.

“While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate,” the bank said in a statement.

In its quarterly Monetary Policy Report, the central bank said economic activity is forecast to remain close to full capacity and “at times modestly above” depending on how the supply side of the economy evolves.

The bank highlighted the risk that U.S. trade protectionism could drive firms to boost offshore production, hurting exports and business investment.

“This less aggressive stance on interest rates partly reflects concerns over NAFTA renegotiations and, to a lesser extent, the stronger Canadian dollar,” David Madani, senior economist at Capital Economics, said in a research note, adding that he does not expect another rate hike this year.

The bank said recent mortgage rule tightening would dampen housing activity, and warned that a drop in house prices in Toronto or Vancouver could douse residential investment and consumption in those areas and have “modest direct spillovers” to the rest of Canada.

Reporting by Andrea Hopkins; Editing by Susan Thomas and Meredith Mazzilli

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