Bank of Canada opens door to possible rate cut if recent slowdown lingers

OTTAWA (Reuters) - The Bank of Canada left interest rates on hold as expected on Wednesday but said a future cut was possible should a recent slowdown in domestic growth persist, raising market bets the central bank could ease as soon as this spring.

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The door “is open” to a possible rate cut, Bank of Canada Governor Stephen Poloz told reporters at a news conference. “But it hinges on how the data evolve from here.” [nL1N29P0WW}

The Canadian dollar tumbled as much as 0.6% to hit its weakest level since the start of the year at 1.3155 per U.S. dollar, or 76.02 U.S. cents.

Money markets now see about a 40% chance of a rate cut by April, up from less than 20% before the rate decision.

The central bank, which has sat firmly on the sidelines for more than a year, cut its forecast for fourth quarter annualized growth to 0.3% from 1.3% in October and pegged first quarter annualized growth in 2020 at 1.3%.

The Canadian economy was no longer operating close to capacity, the bank said, adding it would pay close attention to developments in consumer spending, the housing market and business investment.

Wednesday’s statement marked the second time in recent months the central bank has mused about easing rates. Poloz told reporters in October the bank had considered taking out an “insurance cut” to help the economy weather downside risks from global trade tensions, but opted against it because of concerns around financial vulnerabilities.

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Analysts had said ahead of the bank’s rate decision that a recent string of unimpressive domestic data would likely drag down fourth-quarter growth.

The Bank of Canada “is leaving open the possibility that the economy surprises to the downside,” said Royce Mendes, Chief Economist at CIBC Capital Markets.

“There’s very little margin for error in that Bank of Canada base case forecast and they appear to have at least opened the door to a possibility of rate cut in the spring,” he added.

The release of weaker-than-expected domestic data continued earlier Wednesday, with Statistics Canada reporting Canadian wholesale trade, an important contributor the monthly GDP report, fell 1.2% in November.

Meanwhile, Statscan said Canada’s annual inflation rate held steady as expected at 2.2% in December supported by higher energy prices and balanced out by slower cost gains in food and cars.

The statistical agency also released new home prices for December, which gained 0.2% in December.

Reporting by Kelsey Johnson in Ottawa, additional reporting by Steve Scherer and David Ljunggren in Ottawa, Editing by Alex Richardson, Nick Zieminski and Jonathan Oatis