(Adds market reaction, economist comment)
By Andrea Hopkins and Leah Schnurr
OTTAWA May 24 The Bank of Canada held interest
rates steady on Wednesday, as expected, saying that while
economic growth was likely to moderate in the second quarter,
government measures to rein in the housing market have not yet
had a substantial effect.
In a statement seen as less dovish than some had expected,
the central bank said excess capacity remains in the economy and
wage growth is subdued but noted strong spending by Canadians
along with a housing boom and job growth.
"Consumer spending and the housing sector continue to be
robust on the back of an improving labor market, and these are
becoming more broadly based across regions," the bank said in a
statement accompanying the rate decision.
While it kept the benchmark interest rate at 0.50 percent,
as expected, economists said the statement's tone suggested a
slight shift in stance towards eventual interest rate increases,
which most market-watchers do not expect until 2018.
"The one thing we picked up is they dropped the word
'material' when they talked about excess capacity. They used to
talk about material excess capacity and now they just talk about
excess capacity," said Doug Porter, chief economist at BMO
"We're slowly but surely moving towards the day when the
bank might actually consider raising interest rates. I think
that's still a long way down the road, but you've got to walk
before you run," he added.
The shift in tone helped boost the Canadian dollar, which
touched C$1.3430 to the U.S. dollar, its strongest since
April 24, but has since trimmed some gains to trade at C$1.3447
in late morning trade.
The central bank also said recent measures taken in parts of
Canada to rein in hot housing markets have not yet had "a
substantial cooling effect."
Fearful of a housing bubble, the federal government has
tightened mortgage lending rules while provincial governments
have imposed taxes on foreign buyers in Vancouver and Toronto.
Bank of Canada Governor Stephen Poloz has previously said
gains in home prices in those cities are unsustainable, and
speculation was probably a factor. Household debt compared with
income is at a record high.
The bank said Canada's exporters still face "competitiveness
challenges" and uncertainties remain but that recent indicators
of business investment were encouraging.
Poloz has said U.S. trade protectionism is the biggest cloud
on the horizon for Canada, which sends some 75 percent of its
exports to the United States.
(Reporting by Andrea Hopkins and Leah Schnurr; Editing by Lisa
Von Ahn and James Dalgleish)