March 7, 2019 / 6:02 PM / 10 months ago

UPDATE 2-Bank of Canada sees longer 'detour' for economy, growth up later in year

(Adds analyst comment, new quotes)

By Julie Gordon and Dale Smith

OTTAWA, March 7 (Reuters) - Canada’s economy may be in for a longer “detour” than first thought on weak consumer spending and business investment, but economic growth is set to pick up later in 2019, a deputy governor of the Bank of Canada said on Thursday.

Speaking the day after the central bank said there was “increased uncertainty” on the timing of future hikes, Lynn Patterson said the Wednesday decision to hold rates hinged on a slowing global economy, ongoing trade tensions, and the weakness of the Canadian economy in the fourth quarter of 2018.

“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected,” she told a business audience in Hamilton, Ontario.

Patterson reiterated that the Bank of Canada now expects the economy will be weaker than projected in the first half of 2019, but said it still expects economic growth to pick up later in the year, supported by strength in employment and rising wages.

“The new narrative of the past couple of days is clearly less optimistic, particularly about the near term, relative to the Bank’s January projections,” said Royce Mendes, a senior economist with CIBC Capital Markets, in a note.

Mendes added that while the market is now pricing in a chance of a rate cut this year, the central bank had “yet to issue a full surrender on its plan to eventually raise rates.”

The Canadian dollar clung to modest gains at $1.3432 to the U.S. dollar after the text of Patterson’s speech was released.

The Bank of Canada has raised its rates five times since July 2017, though it has held its overnight interest rate steady at 1.75 percent since October of last year.

In its Wednesday decision, the bank removed wording around the need for rates to rise over time into a neutral range, in contrast to previous statements and a speech by Governor Stephen Poloz on Feb. 21.

Speaking with media after her speech, Patterson said that bank staff was reviewing its neutral rate range ahead of new economic projections in April, and will decide if there should be “any shifts in that range.”

In her speech, Patterson noted that household spending was a bit softer than expected in 2018, as Canadians adjusted to higher carrying costs on their debt and grappled with lower confidence.

Still, she said the data suggested that the majority of households are managing their debt levels and noted more stringent mortgage rules introduced last year were having their intended effect of improving the quality of new borrowing.

When asked if the central bank was worried those rules would push unqualified buyers to seek loans on the secondary mortgage market, Patterson said it was to be watched and would be a concern “if that part of the market becomes too large.” (Reporting by Julie Gordon and Dale Smith in Ottawa Editing by James Dalgleish)

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