OTTAWA (Reuters) - The Bank of Canada warned on Wednesday that the economy could be weaker than it anticipated just two months ago as exports disappointed, but the central bank held rates steady as it stuck to a forecast that growth will bounce back in the second half.
In a statement that was bleaker than the market had expected, the bank also said the U.S. outlook for business investment has become less certain, despite a healthy labor market and solid consumption.
"Exports disappointed even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production," the bank said in the statement.
Canada is counting on U.S. demand to boost exports and lift Canada's economy out of the malaise as slumping commodity prices hurt the key resource sector. The Canadian economy shrank at an annual rate of 1.6 percent in the second quarter.
"The overall interpretation is maybe a little bit more dovish than what we had thought going in," said David Tulk, chief Canada macro strategist at TD Securities, adding the bank's next move might be a rate cut, rather than the rate hike many have forecast. [CA/POLL]
As expected, the bank held its overnight rate at 0.5 percent, where it has been since July 2015.
The Canadian dollar weakened against the greenback after the statement. [CAD/]
"While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July," the bank said in a statement.
Still, the bank projected a "substantial rebound" in economic growth in the second half of the year, boosted by the recovery from a major wildfire that hit Alberta in May and federal stimulus spending.
The bank said risks to the profile for inflation have tilted "somewhat to the downside" since its last statement in July.
The bank again looked to Prime Minister Justin Trudeau's Liberal government to help boost the economy, saying that growth in the fourth quarter is projected to remain above potential as federal infrastructure spending starts to have more impact.
The bank also said while there are preliminary signs of a possible moderation in Vancouver's housing market, Canada's most expensive, financial vulnerabilities linked to household debt remained elevated and continued to rise.
Sales have cooled in Vancouver since a tax on foreign buyers was introduced earlier this year.
Editing by W Simon and JS Benkoe