(Adds analyst comments)
By Randall Palmer and Leah Schnurr
OTTAWA, May 27 (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.
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.
Intially, traders had priced in high odds of a second easing after the bank shocked markets in January with a rate cut in response to falling crude prices. But bets on another move have fallen sharply since.
The bank also flagged the rise in global bond yields and the strengthening of the Canadian dollar in recent weeks in the context of higher oil prices.
“If these developments are sustained, their net effect will need to be assessed as more data become available,” it said.
Canada’s currency fell sharply with the oil price drop last year. It recovered in tandem with oil’s partial rebound, but headed lower again in recent days.
The bank said the economic outlook remains largely as outlined in its April Monetary Policy Report, with underlying inflation estimated at 1.6 to 1.8 percent after “seeing through the various temporary factors”. (Editing by Peter Galloway, Jeffrey Hodgson and W Simon)