September 3, 2008 / 1:23 PM / in 9 years

Bank of Canada holds rates, sees risks to growth

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 will 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.

A FEW BONES

All in all, a fairly neutral statement, analysts said.

“While there were a few bones thrown to the market, like talking about the concerns about the U.S. outlook, I don’t get the sense here at all that the bank is prepared to even consider cutting rates at this point,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“Steady policy for now and aware of the downside risks to growth but not worried enough to act on it any time soon,” said Craig Wright, chief economist at Royal Bank of Canada.

Under Governor Mark Carney, the central bank preemptively slashed rates by 150 basis points between last December and April 2008 and has stuck to the sidelines since then.

Canada’s economy has fared worse than the U.S. economy so far this year but typically feels the fallout from any economic trouble in its top trading partner.

The bank’s latest projection for third-quarter growth in Canada is 1.3 percent. It will update its outlook after it next sets interest rates on October 21.

The bank said the recent decline in commodity prices, triggered by a slowdown in global growth, has been a major factor driving the Canadian dollar lower versus the U.S. currency.

The global weakness and the weaker currency will have “opposing effects” on Canadian growth.

It repeated its view that total and core inflation would converge at the 2 percent target in the second half of 2009 and that the temporary spike in total inflation between now and early 2009 would be lower than projected.

Additional reporting by Frank Pingue and John McCrank; editing by Janet Guttsman

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