March 6, 2019 / 3:12 PM / 3 months ago

UPDATE 2-Bank of Canada holds rates, says pace of hikes now more uncertain

(Adds analyst comments, C$ move, market pricing in chance of cut)

By Julie Gordon and David Ljunggren

OTTAWA, March 6 (Reuters) - Faced with a slowing global and domestic economy, the Bank of Canada held interest rates steady as expected on Wednesday and took a slightly more dovish tone, saying there was “increased uncertainty” about the timing of future rate increases.

The central bank said it now expects the Canadian economy will be weaker in the first half of 2019 than it projected in January, and that it was watching developments in household spending, oil markets and global trade.

The Bank of Canada has raised its rates five times since July 2017, though it has held its overnight interest rate steady at 1.75 percent since October of last year.

It made clear on Wednesday that future hikes were still on the table, but were not imminent, removing wording around the need for rates to rise to the neutral range over time.

“Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range,” it said in a statement, adding that there was “increased uncertainty about the timing of future rate increases.”

The Canadian dollar extended its decline after the decision, weakening to C$1.3448 to U.S. dollar, its lowest point since Jan. 4.

“They’re striking a more dovish tone,” said Nathan Janzen, senior economist at the Royal Bank of Canada, noting it was not surprising after softer-than-expected gross domestic product data last week.

“Until you get more clarity on what the strength or weakness of the economy is, there’s an argument to be made for the Bank of Canada to sit on the sidelines and not hike interest rates further,” Janzen added.

Money markets moved to price in about a 20 percent chance of an interest rate cut by September. Before the announcement, the market had been pricing in a small chance of a hike this year.

Analysts noted that while the tone was more cautious, the central bank was still indicating that the next rate move would be up.

“They’re still saying (the direction is) up, they’re just more uncertain about the timing of the hike,” said Derek Holt, vice president of capital markets at Scotiabank.

The Bank of Canada said it expects inflation to be slightly below its 2 percent target for most of 2019 on temporary factors, including lower energy prices and a wider output gap.

Recent data showed consumer spending and the housing market were soft, it said, despite strong growth in employment and labor income, with exports and business investment falling short of expectations.

Given the mixed picture, the central bank said it would “take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”

Last month, Bank of Canada Governor Stephen Poloz said interest rates still need to move up into the neutral range, but warned the path back was “highly uncertain.”

That neutral rate range has become contentious, with bond investors warning that it may be too high for Canada’s debt-laden economy, hurting its use as a signpost for monetary policy. (Additional reporting by Fergal Smith, John Tilak and Matt Scuffham in Toronto; Editing by Jeffrey Benkoe and Bernadette Baum)

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