September 3, 2014 / 2:38 PM / 3 years ago

UPDATE 2-Bank of Canada stays neutral, frets over household debt

(Adds C$ and analyst reaction, context)

By Randall Palmer and David Ljunggren

OTTAWA, Sept 3 (Reuters) - The Bank of Canada reiterated its explicitly neutral stance and kept its overnight interest rate at 1 percent on Wednesday, while highlighting its concern about the overstretched household sector, in remarks that helped boost the Canadian dollar.

“Overall, the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished,” it stated.

The central bank dropped previous references to the constructive evolution of household imbalances and to a soft landing for the housing market and said “activity in the housing market has been stronger than anticipated.”

And it eliminated its previous expression of “serial disappointment” on global growth, highlighting a solid recovery in the United States and stronger Canadian exports.

Royal Bank of Canada chief economist Craig Wright said the statement was largely unchanged from July, but he did say that at the margins the remarks on housing and household debt “might be interpreted as a little more hawkish.”

The Canadian dollar rose to C$1.0873 to the greenback, or 91.97 U.S. cents, by 11:48 a.m. EDT (1548 GMT), from C$1.0913, 91.63 U.S. cents, before the statement.

“Overall I’d say the sense is that the bank sounds perhaps a little less downbeat than in July,” said Bank of Montreal chief economist Doug Porter.

The central bank was sanguine about inflation, which peaked at a 28-month high of 2.4 percent in June, saying recent data reinforced the view that higher inflation had been attributable to temporary effects “rather than to any change in domestic economic fundamentals.”

Canadian growth in the second quarter was almost exactly as forecast, it said, as exports surged with the support of stronger U.S. investment spending and past depreciation of the Canadian dollar. An increasing number of export sectors appeared to be turning the corner toward recovery.

The overnight rate has been at 1 percent since Sept 8, 2010.

“The bank remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks,” it said.

Governor Stephen Poloz last year dropped the tightening bias of his predecessor, Mark Carney, and in July directly inserted language into the statement saying the bank was neutral.

Virtually no one believes there is a 50 percent chance of a rate cut, however. A Reuters survey of 39 economists before Wednesday’s statement unanimously forecast the next move would be up.

The central bank and finance ministry had long voiced concern about the amount of debt households had taken on, saying that when mortgage rates eventually do rise some Canadians could have trouble. But they had also recognized a tapering off of indebtedness.

The ratio of Canadian household debt to income fell to 163.2 percent in the first quarter from 163.9 percent in the fourth quarter of 2013, Statistics Canada reported on June 19.

Second quarter household debt data will be released on Sept. 12. (Additional reporting by Andrea Hopkins, Solarina Ho and Alastair Sharp in Toronto; Editing by Frances Kerry)

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