Bank of Canada holds rate, softens hawkish language

OTTAWA (Reuters) – The Bank of Canada held its key interest rate at 1 percent, as expected, on Tuesday, but again signaled it may have to raise it later. Still, the bank softened its previous hawkish language to say this was conditional upon continued growth.

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” the central bank said.

Amid a deepening crisis in the euro zone, market participants have waited to see if and how the central bank might temper the language from its April 17 decision, when it said modest withdrawal might become appropriate “in light of the reduced slack in the economy and firmer underlying inflation.”

Canada’s underlying momentum “appears largely consistent with expectations,” despite weaker-than-expected growth in the first quarter, but the global financial outlook had deteriorated in recent weeks because of the European debt crisis.

It said that while the U.S. economy was continuing to slow modestly, emerging economies were slowing faster and a bit more broadly than expected.

“More modest global momentum and heightened financial risk aversion have reduced commodity prices,” the bank said.

Canadian households continued to add to their debt burden amid modest income growth, the bank said. It saw the recovery in net exports staying weak because of modest external demand and competitive challenges, including the Canadian dollar’s persistent strength.

The bank signaled a slightly weaker profile for inflation, with overall inflation falling below 2 percent in the short term because of cheaper gasoline. Core inflation, which excludes gasoline and other items, will remain around 2 percent, it said.

Previously, it had expected CPI inflation to decline in the near term but remain close to 2 percent.

A Reuters survey of analysts taken before the rate decision predicted the bank’s overnight rate would rise in the first quarter of 2013, but markets have, instead, largely priced in an actual rate cut by the end of this year.

(Reporting By Randall Palmer and Louise Egan. Editing by Bernadette Baum)

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