OTTAWA (Reuters) - The Bank of Canada kept its key interest rate at 0.5 percent on Wednesday, declaring its previous two rate cuts were still stimulating an economy that is benefiting from solid household spending and a firm U.S. recovery.
It added some important caveats about uncertainty abroad and continued troubles in the resource sector, but the market quickly interpreted the statement as meaning the central bank was less likely to cut interest rates in the future.
“It seems they’re quite comfortable with a balanced assessment of risk, so I think this leaves the Bank of Canada on the sidelines for quite some time,” Toronto-Dominion Bank chief Canada macro strategist David Tulk said.
The bank had cut rates in January and in July because of the sharp oil price drop, which was causing serious reductions in business investment, especially in the oil patch.
It said on Wednesday that the resource sector continued “to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy” - adjustments it said were complex and would take considerable time.
And it said increasing uncertainty about growth prospects in China and other emerging markets was raising questions about the pace of global recovery.
However, weakness in the Canadian dollar is helping absorb some of the impact of lower commodity prices and facilitating economic adjustments, it noted, with exchange rate-sensitive exports regaining momentum.
Still the bank said the overall export picture remained uncertain, which struck Bank of Montreal Chief Economist Doug Porter.
“I think caution is the byword here,” he said. “That’s despite their previous sunny optimism on that front and the fact that we’ve seen two very good monthly trade numbers in a row.”
The market had expected the bank to stay on hold, particularly after data showed substantial economic growth in June ending five months of contractions, and solid job growth and trade performance.
Traders reduced their bets of a rate cut in October to a 19 percent chance from a 32 percent chance beforehand. The market still priced in a 46 percent chance of a cut by April 2016.
The Canadian dollar rallied to a session high of C$1.3155 to the U.S. dollar, or 76.02 U.S. cents, from C$1.3248, or 75.48 U.S. cents.
Canada’s low rates have led to a hot housing market but the statement made no reference to that, saying only “risks to financial stability are evolving as expected.”
Additional reporting by Andrea Hopkins, Alastair Sharp and Solarina Ho in Toronto; Editing by W Simon and Chizu Nomiyama