* Bank of Canada holds key rate at 1 pct, as expected
* Says growth in exports, business investment delayed
* Says household sector evolving constructively
By Louise Egan and Randall Palmer
OTTAWA, Sept 4 The Bank of Canada held its key
interest rate steady on Wednesday but signaled it has concerns
about global economic uncertainty and the health of the
country's export sector, suggesting it is in no rush to follow
the U.S. Federal Reserve in altering monetary policy.
In a statement accompanying its widely expected rate
decision, the central bank repeated its vague tightening bias,
pointing to higher rates somewhere on the horizon. But it also
highlighted the slack in Canada's economy and muted inflation,
and cited signs of improvement in household debt and in the
housing market, all of which suggested such a move is some way
By contrast, forecasts are for the Fed to start scaling back
its bond purchases soon as a first step towards eventual rate
The Bank of Canada was the first Group of Seven central bank
to tighten policy following the global financial crisis, hiking
its main interest rate three times in 2010 to the current level
of 1 percent. It has since kept to the sidelines. Economists
surveyed by Reuters in late August expected the bank to resume
raising rates in the fourth quarter of 2014.
The bank said on Wednesday its outlook for the domestic and
global economies is largely unchanged from July. Yet it noted
"less momentum overall than anticipated" in the U.S. economy.
Analysts saw a slight dovish slant in the bank's wording,
but doubted there would be much change in terms of a timetable
for eventual rate hikes.
"On the margins, it was a bit on the dovish side, but really
it's steady as she goes," said Andrew Kelvin, senior fixed
income strategist at TD Securities.
The bank predicted the economy would begin to absorb excess
slack in 2014, puzzling some economists who had seen that
process beginning later this year, based on the bank's own
growth forecasts in July.
The bank believes the economy must grow by more than 2.1
percent to narrow the output gap - the difference between how
much the economy produces and its potential production. In July,
it projected third- and fourth-quarter growth at 3.8 percent and
2.5 percent, respectively.
"Realistically, if you look at their most recent quarterly
forecast ... they had suggested it would begin to narrow in the
second half of this year, so maybe at the margin slightly
dovish, but mostly in line with expectations," said Mark
Chandler, a fixed-income and currency strategist at Royal Bank
EXPORT COMEBACK DELAYED
The bank also noted that exports and business investment,
which it sees as key ingredients for a full economic comeback in
Canada, have not yet replaced consumers as the main engine of
growth as it had hoped.
"Uncertain global economic conditions appear to be delaying
the anticipated rotation of demand in Canada towards exports and
investment," the bank said.
Consumer spending and a frothy housing market powered
Canada's quick recovery from the 2008-09 recession but now
policymakers, worried that Canadians are taking on too much
debt, are looking to exporters and corporations to take the
"Perhaps for Canada the important thing here is that the
so-called great rotation from consumer spending and housing to
business investment and exports has disappointed the bank," said
Doug Porter, chief economist at BMO Capital Markets.
"That came through loud and clear in the second quarter
numbers," he said.
The lack of major surprises in the statement was seen as
neutral for the Canadian dollar, which nonetheless strengthened
after the release of the bank statement as it caught up with
other currencies rallying on upbeat global economic data.
It was trading at C$1.0487 versus the U.S. dollar, or 95.36
U.S. cents, at about 12:50 a.m. (1650 GMT), firmer than
Tuesday's North American finish of C$1.0530, or 94.97 U.S.
As Fed officials talk of scaling back the U.S. central
bank's $85 billion-a-month bond purchasing program, possibly as
soon as September, the market reaction is being felt in Canada.
Since the Bank of Canada's July statement, the Canadian
dollar has weakened against the greenback, which should benefit
hard-hit exporters. But five-year bond yields have increased,
pushing mortgage rates higher and potentially cooling the
Bank of Canada Deputy Governor John Murray said last month
the net effects on Canada of Fed "tapering" would be positive.
While Canada's housing market has been stronger than
anticipated, the strength has been tempered by slower credit
growth and higher mortgage rates, the bank said, signaling no
major concern on that front.