September 4, 2019 / 2:14 PM / 3 months ago

UPDATE 2-Bank of Canada holds rates, analysts see less chance of Oct rate cut

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By Kelsey Johnson and David Ljunggren

OTTAWA, Sept 4 - The Bank of Canada held interest rates steady as expected on Wednesday but made no mention of future cuts, prompting market analysts to downgrade the likelihood of the bank lowering rates next month.

The central bank - which has sat on the sidelines since last October - maintained its key overnight rate at 1.75%. The current level of stimulus remained appropriate, it said, reiterating the pace of Canadian economic growth would slow down in the second half of the year.

The bank, which has showed no appetite for cutting rates amid steady domestic activity, has sat on the sidelines even as some of its counterparts eased borrowing costs or signaled their intention to loosen monetary policy.

Andrew Kelvin, chief Canada strategist at TD Securities, said the statement “is a little bit less dovish than markets had been set up for.”

Market expectations of an interest rate cut on Oct 30, as reflected in the overnight index swaps markets, fell to 54% percent from 66%.

A Reuters poll released last week found economists were divided on whether the bank would cut rates this year or hold off until early 2020.

“They are not going to pigeon-hole themselves into signaling a cut in the October or December meeting,” said Simon Harvey, foreign exchange market analyst for Monex Europe and Monex Canada.

The Canadian dollar strengthened to C$1.3282 to the U.S. dollar, or 75.29 U.S. cents.

The U.S. Federal Reserve, whose chair Jerome Powell has faced increased political pressure from U.S. President Donald Trump, cut rates for the first time since 2008 at the end of July because of the ongoing U.S.-China trade war and weakening global growth.

The Bank of Canada statement said the negative effects of the trade conflict between the United States and China were “weighing more heavily on global economic momentum” than it had projected in July.

Looking ahead to the next rate announcement, the bank said it would “pay particular attention to global developments and their impact on Canadian growth and inflation.”

The Bank of Canada noted the domestic economy was operating close to potential while inflation hovered around the central bank’s 2% target.

It added, however, that given the increasing uncertainty about trade and falling second quarter business investment and consumption spending, “the bank expects economic activity to slow in the second half of the year”.

Additional reporting by Steve Scherer in Ottawa and Fergal Smith in Toronto; Editing by Nick Zieminski

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