UPDATE 1-Bank of Canada holds rates, worries about weak inflation
* Bank of Canada holds key rate at 1.0 percent
* Says risks of low inflation appear to have increased
* Continues to predict soft landing in housing market
OTTAWA, Dec 4 (Reuters) - The Bank of Canada held its key interest rate steady on Wednesday but sounded a touch more dovish in its outlook, saying the risks of undesirably weak inflation appeared greater than they did six weeks ago.
The central bank stunned markets in October by abandoning 18 months of signaling that rate hikes were on the horizon. But it made clear at the time it was just as likely to raise rates as to lower them as it was caught between excessive household debt on one hand and below-target inflation on the other.
The bank's statement on Wednesday showed it was now increasingly concerned about possible disinflation after the inflation rate dropped to 0.7 percent in October. It added, however, that the balance of risks remained within the range of possible scenarios it identified in October.
"The risks associated with elevated household imbalances have not materially changed, while the downside risks to inflation appear to be greater," it said.
"Weighing these considerations, the bank judges that the substantial monetary policy stimulus currently in place remains appropriate ...," it said.
The Canadian dollar briefly weakened after the statement to C$1.0689 to the U.S. dollar, compared with C$1.0663 an hour earlier.
The bank has kept its overnight rate target at 1 percent since September 2010, following three successive hikes that year as Canada pulled out of a relatively mild recession.
None of 32 analysts polled by Reuters last week had expected any rate move on Wednesday, but many market players were nonetheless bracing for the possibility that the bank would somehow introduce more dovish language without signaling actual rate cuts.
The median forecast in that poll was for the bank to start raising rates in the second quarter of 2015.
The Bank of Canada targets 2 percent inflation, within a range of 1 to 3 percent. The rate has been below 2 percent since May 2012.
The bank's statement on Wednesday said sluggish core inflation was caused by significant excess supply in the economy and fierce competition in the retail sector, which it said was more persistent than it had anticipated. Overall inflation has been pushed down by gasoline price cuts.
The bank's growth outlook was little changed and it maintained its projection that the economy would return to full capacity around the end of 2015.
Exports and business investment have continued to disappoint but housing market has been "stronger than expected." It nonetheless continues to predict a soft landing for housing.